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PROSPECTUS --MAY 1, 2000
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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 Flexible Premium Variable Life Insurance Policy
("Policy") offered by Kemper Investors Life Insurance Company ("we" or
"KILICO"). 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 25 for a discussion of laws that affect the tax
treatment of the Policy.
You have 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 are currently available under the Policy:
- THE ALGER AMERICAN FUND
- Alger American Balanced
- Alger American Growth
- Alger American Income & Growth
- Alger American MidCap Growth
- THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- DREYFUS LIFE & ANNUITY INDEX FUND D/B/A
DREYFUS STOCK INDEX FUND
- DREYFUS VARIABLE INVESTMENT FUND ("DREYFUS VIF")
- Dreyfus VIF-Appreciation (formerly Capital Appreciation)
- Dreyfus VIF-Small Cap
- FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST* (CLASS 2
SHARES)
- Templeton Asset Strategy (formerly Templeton Asset Allocation)
- Templeton Global Income Securities (formerly Templeton Bond)
- Templeton Developing Markets Securities (formerly Templeton
Developing Markets)
- Templeton International Securities (formerly Templeton
International)
- - FIDELITY VARIABLE INSURANCE PRODUCTS FUND (INITIAL CLASS)
- Fidelity VIP Equity-Income
- Fidelity VIP Growth
- Fidelity VIP High Income
- Fidelity VIP Overseas
- - JANUS ASPEN SERIES
- Janus Aspen Aggressive Growth
- Janus Aspen Balanced
- Janus Aspen Flexible Income
- Janus Aspen Growth
- Janus Aspen International Growth
- Janus Aspen Worldwide Growth
- - SCUDDER VARIABLE LIFE INVESTMENT FUND ("SCUDDER VLIF") (CLASS A SHARES)
- Scudder VLIF Capital Growth
- Scudder VLIF Growth and Income
- Scudder VLIF International
- - KEMPER VARIABLE SERIES
- Kemper Government Securities
- Kemper Investment Grade Bond
- Kemper Money Market
- Kemper Small Cap Growth
- Kemper Total Return
- Kemper Value+Growth
* Effective May 1, 2000, the funds of Templeton Variable Products Series
Fund merged into similar corresponding funds of Franklin Templeton Variable
Insurance Products Trust.
You may obtain more information about these Portfolios in the accompanying
prospectuses. Not all portfolios described in the prospectuses may be available
under the Policy.
You choose 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.
You 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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<TABLE>
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PAGE
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DEFINITIONS................................................. 1
SUMMARY..................................................... 3
FEES AND EXPENSES........................................... 5
KILICO AND THE SEPARATE ACCOUNT............................. 9
THE FUNDS................................................... 9
FIXED ACCOUNT OPTION........................................ 12
THE POLICY.................................................. 13
POLICY BENEFITS AND RIGHTS.................................. 15
CHARGES AND DEDUCTIONS...................................... 19
GENERAL PROVISIONS.......................................... 22
DOLLAR COST AVERAGING....................................... 24
SYSTEMATIC WITHDRAWAL PLAN.................................. 24
DISTRIBUTION OF POLICIES.................................... 25
FEDERAL TAX MATTERS......................................... 25
LEGAL CONSIDERATIONS........................................ 28
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 28
VOTING INTERESTS............................................ 28
STATE REGULATION OF KILICO.................................. 28
KILICO'S DIRECTORS AND OFFICERS............................. 29
LEGAL MATTERS............................................... 31
LEGAL PROCEEDINGS........................................... 31
EXPERTS..................................................... 31
REGISTRATION STATEMENT...................................... 31
FINANCIAL STATEMENTS........................................ 31
APPENDIX A TABLE OF DEATH BENEFIT FACTORS................... 71
APPENDIX B SURRENDER TARGET PREMIUMS........................ 72
</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.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.
DATE OF RECEIPT--The date on which a request, form or payment is received
at our home office, provided: (1) that date is a Valuation Date and (2) we
receive the request, form or payment before the close of the New York Stock
Exchange (usually 3:00 p.m. Central time). Otherwise, the next Valuation Date.
DEBT--The sum of (1) the principal of any outstanding loan, plus (2) any
loan interest due or accrued to us.
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 you 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 you receive 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.
NET SURRENDER VALUE--The Surrender Value on the date of surrender minus any
Debt.
OWNER ("YOU", "YOUR", "YOURS")--The person(s) named as owner in the
application unless later changed as provided in the Policy.
PLANNED PREMIUM--The scheduled premium you specify in the application.
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 subject to the conditions set forth in the application, including the
payment of the initial premium.
POLICY YEAR--Each year commencing with the Policy Date and each Policy Date
anniversary thereafter.
PORTFOLIO(S)--The underlying Portfolios in which the Subaccounts invest.
Each Portfolio is an open-end investment company registered with the SEC or a
separate investment series of a registered open-end investment company.
SEPARATE ACCOUNT VALUE--The portion of the Cash Value in the Subaccount(s)
of the Separate Account.
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SPECIFIED AMOUNT--The amount chosen by you 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 any applicable surrender charge.
TRADE DATE--The date 30 days following the date you complete 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.
You pay a premium for life insurance coverage on the Insured. Generally,
you 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
13, "Charges and Deductions," page 19, and "Policy Benefits and Rights," page
15.)
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. If the Policy is treated as a modified endowment contract,
certain distributions will be included in your federal gross income (See
"Federal Tax Matters," page 25.)
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. You bear 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 17.)
You may surrender a Policy at any time and receive the Net Surrender Value.
The Net Surrender Value is the Surrender Value minus any outstanding Debt. The
Surrender Value is the Cash Value minus any applicable surrender charge. Partial
withdrawals are available subject to restrictions. (See "Policy Benefits and
Rights--Surrender Privilege," page 19.)
POLICY LOANS. After the first Policy Year, you may borrow up to 90% of Cash
Value minus surrender charges and any other indebtedness. Interest is charged at
an effective annual rate of 4.50%. (See "Federal Tax Matters," page 25.)
PREFERRED LOANS. After the first Policy Year, you may borrow an amount up
to the earnings in the Policy subject to any previous indebtedness. Interest on
preferred loans is charged at an effective annual rate of 3%.
The minimum amount of any loan is $500. 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 you request 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 18.)
If the Policy is a modified endowment contract, a loan is treated as a
taxable distribution. (See "Federal Tax Matters," page 25.)
DEATH BENEFITS. An in force Policy pays a death benefit upon the death of
the Insured. The Policy has two death benefit options. The Policy owner elects a
death benefit option on the application. 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 A. The death benefit payable is reduced by any Debt. (See
"Policy Benefits and Rights--Death Benefits," page 15.)
PREMIUMS
The amount and frequency of premium payments are flexible. You specify a
Planned Premium on the application. However, you are 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 you pay premiums affects whether the Policy will be
classified as a modified endowment contract. The minimum monthly premium payment
is $50. Other minimums apply for other payment modes.
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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 13.)
THE SEPARATE ACCOUNT
ALLOCATION OF PREMIUMS. The portion of the premium available for allocation
equals the premium paid less applicable charges. You indicate 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 thirty-one
Subaccounts, each of which invests in shares of a designated Portfolio.
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 your instructions in
the application. (See "The Policy--Policy Issue," page 13.)
TRANSFERS. You may transfer Separate Account Value among the Subaccounts
and into the Fixed Account once every fifteen days. One annual transfer is
permitted from the Fixed Account to the Subaccounts. (See "The
Policy--Allocation of Premiums and Separate Account Value," page 13.)
THE FUNDS
The following Portfolios of The Alger American Fund are currently available
for investment by the Separate Account:
- ALGER AMERICAN BALANCED
- ALGER AMERICAN GROWTH
- ALGER AMERICAN INCOME & GROWTH
- ALGER AMERICAN MIDCAP GROWTH
The Dreyfus Socially Responsible Growth Fund, Inc. is currently available
for investment by the Separate Account.
Dreyfus Life & Annuity Index Fund, d/b/a Dreyfus Stock Index Fund
(hereinafter "Dreyfus Stock Index Fund") is currently available for investment
by the Separate Account.
The following Portfolios of the Dreyfus Variable Investment Fund are
currently available for investment by the Separate Account:
- DREYFUS VIF - APPRECIATION (FORMERLY CAPITAL APPRECIATION)
- DREYFUS VIF - SMALL CAP
Class 2 Shares of the following Portfolios of the Franklin Templeton
Variable Insurance Products Trust are currently available for investment by the
Separate Account:
- TEMPLETON ASSET STRATEGY (FORMERLY TEMPLETON ASSET ALLOCATION)
- TEMPLETON GLOBAL INCOME SECURITIES (FORMERLY TEMPLETON BOND)
- TEMPLETON DEVELOPING MARKETS SECURITIES (FORMERLY TEMPLETON
DEVELOPING MARKETS)
- TEMPLETON INTERNATIONAL SECURITIES (FORMERLY TEMPLETON
INTERNATIONAL)
Initial Class Shares of the following Portfolios of the Fidelity Variable
Insurance Products Fund are currently available for investment by the Separate
Account:
- FIDELITY VIP EQUITY-INCOME
- FIDELITY VIP GROWTH
- FIDELITY VIP HIGH INCOME
- FIDELITY VIP OVERSEAS
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The following Portfolios of the Janus Aspen Series are currently available
for investment by the Separate Account:
- JANUS ASPEN AGGRESSIVE GROWTH
- JANUS ASPEN BALANCED
- JANUS ASPEN FLEXIBLE INCOME
- JANUS ASPEN GROWTH
- JANUS ASPEN INTERNATIONAL GROWTH
- JANUS ASPEN WORLDWIDE GROWTH
Class A Shares of the following Portfolios of the Scudder Variable Life
Investment Fund are currently available for investment by the Separate Account:
- SCUDDER VLIF CAPITAL GROWTH
- SCUDDER VLIF GROWTH AND INCOME
- SCUDDER VLIF INTERNATIONAL
The following Portfolios of the Kemper Variable Series are currently
available for investment by the Separate Account:
- KEMPER GOVERNMENT SECURITIES
- KEMPER INVESTMENT GRADE BOND
- KEMPER MONEY MARKET
- KEMPER SMALL CAP GROWTH
- KEMPER TOTAL RETURN
- KEMPER VALUE+GROWTH
For a more detailed description of the Funds, see "The Funds," page 9, the
Funds' prospectuses accompanying this Prospectus, and Statements of Additional
Information available from us upon request.
FEES AND EXPENSES
The following tables are designed to help you understand the fees and
expenses that you bear, directly or indirectly, as a Policy Owner. The first
table describes the Policy charges and deductions you directly bear under the
Policy. The second table describes the fees and expenses of the Portfolios that
you bear indirectly when you purchase a Policy. Expenses of the Portfolios are
not fixed or specified under the terms of the Policy, and actual expenses may
vary. (See "Charges and Deductions", beginning on page 19.)
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POLICY CHARGES AND DEDUCTIONS
CHARGES DEDUCTED FROM THE SEPARATE ACCOUNT:
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Mortality and Expense Risk Charge: CURRENT: .60% of average daily assets for
first ten Policy Years; .40% for Policy
Years eleven through twenty; and .20% for
Policy Year twenty-one and thereafter
GUARANTEED: .60% for all Policy Years
Federal Income Tax Charge: Currently none(1)
CHARGES DEDUCTED FROM THE CASH VALUE (DEDUCTED MONTHLY):
Cost of Insurance Charge(2): CURRENT: Ranges from $0.05668 per month per
$1,000 of net amount at risk to $36.32850
per month per $1,000 of net amount at
risk(3)
GUARANTEED: Ranges from $0.05668 per month
per $1,000 of net amount at risk to
$83.33333 per month per $1,000 of net amount
at risk(3)
Administrative Expense Charge: $10 monthly in Policy Year one; currently $6
monthly in Policy Years two and thereafter,
with a $7.50 maximum monthly charge
guaranteed
Tax Charge: 2.5% from each premium payment for state and
local taxes(4)
1% from each premium payment for corporate
income tax liability(4)
Sales Load: 2.5% from each premium payment(4)
Systematic Withdrawal Charge: $50 for the initial set-up plus $25 each
time a change is made to the plan
TRANSACTION CHARGES:
Transfer Fee: $25 per transfer in excess of twelve
transfers in a single Policy Year(5)
Maximum Partial Withdrawal Charge: $25 per partial withdrawal after the first
partial withdrawal in a single Policy
Year(6)
Maximum Surrender Charge(7): 100% of the target premium as shown in
Appendix B
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(1) We currently do not assess a charge for federal income taxes that may be
attributed to the operations of the Separate Account. We reserve the right
to do so in the future. (See "Charges and Deductions," beginning on page
19.)
(2) The current cost of insurance charge will never exceed the guaranteed cost
of insurance charge shown in the Policy Specifications. The net amount at
risk equals the death benefit divided by 1.0024663, minus Cash Value. (See
"Charges and Deductions--Cost of Insurance Charge," page 20.)
(3) Current and guaranteed cost of insurance charges are based on the issue age
(or attained age following an increase in Specified Amount), sex, Insured's
rate class, and Policy Year.
(4) Before net premiums are allocated.
(5) Except there will be no transfer charge for transfers related to Automatic
Asset Reallocation and Dollar Cost Averaging.
(6) Except there will be no partial withdrawal charge for withdrawals taken
under the Systematic Withdrawal Plan.
(7) We deduct a surrender charge if the Policy is surrendered or the Cash Value
is applied under a Settlement Option prior to the eleventh Policy Year (or
the eleventh Policy Year following an increase in Specified Amount).
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PORTFOLIO EXPENSES
(As a percentage of average net assets for the period ended December 31, 1999)
(total expense figures shown are after fee waivers or reductions
and expense reimbursements)
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12B-1 TOTAL PORTFOLIO TOTAL PORTFOLIO
PORTFOLIO MANAGEMENT FEES FEES OTHER EXPENSES ANNUAL EXPENSES
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Alger American Balanced.......................... 0.75% 0.18% 0.93%
Alger American Growth............................ 0.75% 0.04% 0.79%
Alger American Income & Growth................... 0.625% 0.075% 0.70%
Alger American MidCap Growth..................... 0.80% 0.05% 0.85%
The Dreyfus Socially Responsible Growth Fund,
Inc. .......................................... 0.75% 0.04% 0.79%
Dreyfus Stock Index Fund......................... 0.25% 0.01% 0.26%
Dreyfus VIF-Appreciation......................... 0.75% 0.03% 0.78%
Dreyfus VIF-Small Cap............................ 0.75% 0.03% 0.78%
Templeton Asset Strategy(1)(3)................... 0.60% 0.25% 0.18% 1.03%
Templeton Global Income Securities(1)(2)(4)...... 0.60% 0.25% 0.05% 0.90%
Templeton Developing Markets Securities(1)(5).... 1.25% 0.25% 0.31% 1.81%
Templeton International Securities(1)(6)......... 0.69% 0.25% 0.19% 1.13%
Fidelity VIP Equity-Income(8).................... 0.48% 0.08% 0.56%
Fidelity VIP Growth(8)........................... 0.58% 0.07% 0.65%
Fidelity VIP High Income......................... 0.58% 0.11% 0.69%
Fidelity VIP Overseas(8)......................... 0.73% 0.14% 0.87%
Janus Aspen Aggressive Growth(9)................. 0.65% 0.02% 0.67%
Janus Aspen Balanced(9).......................... 0.65% 0.02% 0.67%
Janus Aspen Flexible Income...................... 0.65% 0.07% 0.72%
Janus Aspen Growth(9)............................ 0.65% 0.02% 0.67%
Janus Aspen International Growth(9).............. 0.65% 0.11% 0.76%
Janus Aspen Worldwide Growth(9).................. 0.65% 0.05% 0.70%
Scudder VLIF Capital Growth...................... 0.46% 0.03% 0.49%
Scudder VLIF Growth and Income................... 0.47% 0.08% 0.55%
Scudder VLIF International....................... 0.85% 0.18% 1.03%
Kemper Government Securities..................... 0.55% 0.08% 0.63%
Kemper Investment Grade Bond(7).................. 0.60% 0.05% 0.65%
Kemper Money Market.............................. 0.50% 0.04% 0.54%
Kemper Small Cap Growth.......................... 0.65% 0.06% 0.71%
Kemper Total Return.............................. 0.55% 0.06% 0.61%
Kemper Value + Growth(7)......................... 0.75% 0.08% 0.83%
</TABLE>
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(1) The Portfolio's Class 2 distribution plan or "Rule 12b-1 Plan" is described
in the Portfolio's prospectus.
(2) The Portfolio's administration fee is paid indirectly through the management
fee.
(3) On February 8, 2000, Portfolio shareholders approved a merger and
reorganization that combined the Portfolio with Templeton Global Asset
Allocation Fund, effective May 1, 2000. The shareholders of that fund had
approved new management fees, which apply to the combined fund effective May
1, 2000. The table shows restated total expenses based on the new fees and
the assets of the Portfolio as of December 31, 1999, and not the assets of
the combined fund. However, if the table reflected both the new fees and the
combined assets, the Portfolio's expenses after May 1, 2000 would be
estimated as: Management Fees 0.60%, 12b-1 Fees 0.25%, Total Portfolio Other
Expenses 0.14%, and Total Portfolio Annual Expenses 0.99%.
(4) On February 8, 2000, a merger and reorganization was approved that combined
the Portfolio with a similar fund of Templeton Variable Products Series
Fund, effective May 1, 2000. The table shows total expenses based on the
Portfolio's assets as of December 31, 1999, and not assets of the combined
fund. However, if the table reflected combined assets, the Portfolio's
expenses after May 1, 2000 would be estimated as: Management Fees 0.60%,
12b-1 Fees 0.25%, Total Portfolio Other Expenses 0.04%, and Total Portfolio
Annual Expenses 0.89%.
(5) On February 8, 2000, Portfolio shareholders approved a merger and
reorganization that combined the Portfolio with the Templeton Developing
Markets Equity Fund, effective May 1, 2000. The shareholders of that fund
had approved new management fees, which apply to the combined fund effective
May 1, 2000. The table shows restated total expenses based on the new fees
and the assets of the Portfolio as of December 31, 1999, and not
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the assets of the combined fund. However, if the table reflected both the new
fees and the combined assets, the Portfolio's expenses after May 1, 2000 would
be estimated as: Management Fees 1.25%, 12b-1 Fees 0.25%, Total Portfolio Other
Expenses 0.29%, and Total Portfolio Annual Expenses 1.79%.
(6) On February 8, 2000, shareholders approved a merger and reorganization that
combined the Portfolio with the Templeton International Equity Fund,
effective May 1, 2000. The shareholders of that fund had approved new
management fees, which apply to the combined fund effective May 1, 2000. The
table shows restated total expenses based on the new fees and the assets of
the Portfolio as of December 31, 1999, and not the assets of the combined
fund. However, if the table reflected both the new fees and the combined
assets, the Portfolio's expenses after May 1, 2000 would be estimated as:
Management Fees 0.65%, 12b-1 Fees 0.25%, Total Portfolio Other Expenses
0.20%, and Total Portfolio Annual Expenses 1.10%.
(7) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on May 1, 2000 to limit their respective fees and to
reimburse other expenses to the extent necessary to limit total operating
expenses of the following described Portfolios to the amounts set forth
after the Portfolio names: Kemper Value+Growth Portfolio (.84%) and Kemper
Investment Grade Bond Portfolio (.80%). The amounts set forth in the table
above reflect actual expenses for the past fiscal year, which were at or
lower than these expense limits.
(8) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce expenses. In addition, certain Portfolios have entered into
arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of Portfolio
expenses. Without these reductions, Management Fees, Total Portfolio Other
Expenses and Total Portfolio Annual Expenses would have been .48%, .09% and
.57%, respectively, for Fidelity VIP Equity-Income Portfolio; .58%, .08% and
.66%, respectively, for the Fidelity VIP Growth Portfolio; and .73%, .18%
and .91%, respectively, for the Fidelity VIP Overseas Portfolio.
(9) Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for Janus Aspen
Aggressive Growth, Janus Aspen Balanced, Janus Aspen Growth, Janus Aspen
International Growth and Janus Aspen Worldwide Growth Portfolios. All
expenses are shown without the effect of any expense offset arrangements.
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
25.)
FREE-LOOK PERIOD
You 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 you receive the
Policy. (See "Policy Benefits and Rights--Free-Look Period and Exchange Rights,"
page 19.)
ILLUSTRATIONS OF CASH VALUE, SURRENDER VALUE, DEATH BENEFIT
Tables in Exhibit 9 to the registration statement illustrate Cash Value,
Surrender Value 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 the actual Policy
values will be higher or lower than those illustrated.
Upon request, we will provide a free, personalized illustration reflecting
the proposed Insured's age, underwriting classification, and sex (where
applicable). Otherwise, a personalized illustration uses the same methodology as
those appearing in Exhibit 9 to the registration statement.
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<PAGE> 11
KILICO AND THE SEPARATE ACCOUNT
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a
stock life insurance company. Our offices are located at 1 Kemper Drive, Long
Grove, Illinois 60049. We offer life insurance and annuity products and are
admitted to do business in the District of Columbia and all states except New
York. We are a wholly-owned subsidiary of Kemper Corporation, a nonoperating
holding company. KILICO and Kemper Corporation are wholly-owned subsidiaries of
Zurich Financial Services ("ZFS"). ZFS is owned by Zurich Allied A.G. and Allied
Zurich p.l.c. fifty-seven percent and forty-three percent, respectively.
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 receives and invests 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 thirty-one 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 Alger American Fund, The
Dreyfus Socially Responsible Growth Fund, Inc., Dreyfus Stock Index Fund,
Dreyfus Variable Investment Fund, Franklin Templeton Variable Insurance Products
Trust, Fidelity Variable Insurance Products Fund, Janus Aspen Series, Scudder
Variable Life Investment Fund and Kemper Variable Series. (Effective May 1,
2000, the funds of Templeton Variable Products Series Fund merged into similar
corresponding funds of Franklin Templeton Variable Insurance Products Trust.)
The Commission does not supervise the Funds' 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.
A Fund may consist of separate portfolios. The assets of each portfolio are
held separate from the assets of the other portfolios, and each portfolio has
its own distinct investment objective and policies. Each portfolio operates as a
separate investment fund, and the income, gains or losses of one portfolio
generally have no effect on the investment performance of any other portfolio.
THE ALGER AMERICAN FUND
The Alger American Fund Portfolios in which the Separate Account invests
are summarized below:
ALGER AMERICAN BALANCED: This Portfolio seeks current income and long-term
capital appreciation.
ALGER AMERICAN GROWTH: This Portfolio seeks long-term capital appreciation.
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<PAGE> 12
ALGER AMERICAN INCOME & GROWTH: This Portfolio primarily seeks to provide a
high level of dividend income; its secondary goal is to provide capital
appreciation.
ALGER AMERICAN MIDCAP GROWTH: This Portfolio seeks long-term capital
appreciation.
Fred Alger Management, Inc. is the investment adviser to each Portfolio of
The Alger American Fund specified above.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
This Fund seeks to provide capital growth, with current income as a
secondary goal. To pursue these goals, the Fund invests primarily in the common
stock of companies that, in the opinion of the Fund's management, meet
traditional investment standards and conduct their business in a manner that
contributes to the enhancement of the quality of life in America.
The Dreyfus Corporation serves as the investment adviser, and NCM Capital
Management Group, Inc. is the sub-adviser, for this Fund.
DREYFUS STOCK INDEX FUND
This Fund seeks to match the total return of the Standard & Poor's
Composite Stock Price Index.
The Dreyfus Corporation serves as the investment adviser for this Fund.
DREYFUS VARIABLE INVESTMENT FUND
The Dreyfus Variable Investment Fund Portfolios in which the Separate
Account invests are summarized below:
DREYFUS VIF-APPRECIATION (FORMERLY CAPITAL APPRECIATION): This Portfolio
seeks long-term capital growth consistent with the preservation of capital;
current income is a secondary goal.
DREYFUS VIF-SMALL CAP: This Portfolio seeks to maximize capital
appreciation.
The Dreyfus Corporation serves as the investment adviser to each Portfolio
of the Dreyfus Variable Investment Fund specified above. Fayez Sarofim & Co.
serves as the sub-adviser for the Dreyfus VIF-Appreciation Portfolio.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
The Franklin Templeton Variable Insurance Products Trust Portfolios in
which the Separate Account invests are summarized below:
TEMPLETON ASSET STRATEGY (FORMERLY TEMPLETON ASSET ALLOCATION) (CLASS 2
SHARES): This Portfolio seeks high total return.
TEMPLETON GLOBAL INCOME SECURITIES (FORMERLY TEMPLETON BOND) (CLASS 2
SHARES): This Portfolio seeks high current income. Capital appreciation is a
secondary consideration.
TEMPLETON DEVELOPING MARKETS SECURITIES (FORMERLY TEMPLETON DEVELOPING
MARKETS) (CLASS 2 SHARES): This Portfolio seeks long-term capital appreciation.
The Portfolio primarily invests in emerging market equity securities.
TEMPLETON INTERNATIONAL SECURITIES (FORMERLY TEMPLETON INTERNATIONAL)
(CLASS 2 SHARES): This Portfolio seeks long-term capital growth.
Templeton Investment Counsel, Inc. is the investment adviser for the
Templeton Asset Strategy Fund, the Templeton Global Income Securities Fund and
the Templeton International Securities Fund. Templeton Asset Management Ltd. is
the investment manager for the Templeton Developing Markets Securities Fund.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
The Fidelity Variable Insurance Products Fund Portfolios in which the
Separate Account invests are summarized below:
FIDELITY VIP EQUITY-INCOME (INITIAL CLASS): This Portfolio seeks reasonable
income.
FIDELITY VIP GROWTH (INITIAL CLASS): This Portfolio seeks capital
appreciation.
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<PAGE> 13
FIDELITY VIP HIGH INCOME (INITIAL CLASS): This Portfolio seeks a high level
of current income while also considering growth of capital.
FIDELITY VIP OVERSEAS (INITIAL CLASS): This Portfolio seeks long-term
growth of capital.
Fidelity Management & Research Company (FMR) is the investment adviser for
the available Portfolios of the Fidelity Variable Insurance Products Fund.
Fidelity Management & Research (U.K.) Inc. (FMR U.K.), in London, England, and
Fidelity Management & Research Far East Inc. (FMR Far East), in Tokyo, Japan,
each serve as sub-advisers to the Fidelity VIP High Income Portfolio and the
Fidelity VIP Overseas Portfolio. Fidelity International Investment Advisors
(U.K.) Limited (FIIA (U.K.) L), in London, England, also serves as sub-adviser
to the Fidelity VIP Overseas Portfolio.
JANUS ASPEN SERIES
The Janus Aspen Series Portfolios in which the Separate Account invests are
summarized below:
JANUS ASPEN AGGRESSIVE GROWTH: This Portfolio seeks long-term growth of
capital.
JANUS ASPEN BALANCED: This Portfolio seeks long-term capital growth,
consistent with preservation of capital and balanced by current income.
JANUS ASPEN FLEXIBLE INCOME: This Portfolio seeks to obtain maximum total
return consistent with preservation of capital.
JANUS ASPEN GROWTH: This Portfolio seeks long-term growth of capital in a
manner consistent with the preservation of capital.
JANUS ASPEN INTERNATIONAL GROWTH: This Portfolio seeks long-term growth of
capital.
JANUS ASPEN WORLDWIDE GROWTH: This Portfolio seeks long-term growth of
capital in a manner consistent with the preservation of capital.
Janus Capital Corporation serves as the investment adviser for the six
available Portfolios of the Janus Aspen Series.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The Scudder Variable Life Investment Fund Portfolios in which the Separate
Account invests are summarized below:
SCUDDER VLIF CAPITAL GROWTH (A SHARES): This Portfolio seeks to maximize
long-term capital growth through a broad and flexible investment program.
SCUDDER VLIF GROWTH AND INCOME (A SHARES): This Portfolio seeks long-term
growth of capital, current income and growth of income.
SCUDDER VLIF INTERNATIONAL (A SHARES): This Portfolio seeks long-term
growth of capital primarily through diversified holdings of marketable foreign
equity investments.
Scudder Kemper Investments, Inc., our affiliate, is the investment adviser
of each Portfolio of the Scudder Variable Life Investment Fund specified above.
KEMPER VARIABLE SERIES
The Kemper Variable Series Portfolios in which the Separate Account invests
are summarized below:
KEMPER GOVERNMENT SECURITIES: This Portfolio seeks high current return
consistent with preservation of capital.
KEMPER INVESTMENT GRADE BOND: This Portfolio seeks high current income.
KEMPER MONEY MARKET: This Portfolio seeks maximum current income to the
extent consistent with stability of principal from a portfolio of high quality
money market instruments. The Portfolio seeks to maintain a net asset value of
$1.00 per share but there can be no assurance that the Portfolio will be able to
do so.
KEMPER SMALL CAP GROWTH: This Portfolio seeks maximum appreciation of
investors' capital.
KEMPER TOTAL RETURN: This Portfolio seeks a high total return, a
combination of income and capital appreciation, consistent with reasonable risk.
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<PAGE> 14
KEMPER VALUE+GROWTH: This Portfolio seeks growth of capital. A secondary
objective of the Portfolio is the reduction of risk over a full market cycle
compared to a portfolio of only growth stocks or only value stocks.
Scudder Kemper Investments, Inc. is the investment manager to each
Portfolio of the Kemper Variable Series specified above.
The Portfolios may not achieve their stated objectives. More detailed
information, including a description of risks involved in investing in the
Portfolios, is found in the Funds' prospectuses and Statements of Additional
Information. The Funds' prospectuses accompany this Prospectus. The Funds'
Statements of Additional Information are available from us upon request.
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions
for the shares held by the Separate Account or that the Separate Account may
purchase. We reserve the right to eliminate the shares of any of the portfolios
and to substitute shares of another portfolio or of another investment company,
if the shares of a portfolio are no longer available for investment, or if in
our judgment further investment in any portfolio becomes inappropriate in view
of the purposes of the Policy or the Separate Account. We may also eliminate or
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 an 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 Owners.
We also reserve the right to establish additional Subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Funds, or
in shares of another investment company. New Subaccounts may be established
when, in our sole discretion, marketing needs or investment conditions warrant.
New Subaccounts may be made available to existing Owners as we determine.
If we deem it to be in the best interests of persons having voting
interests under the Policy, the Separate Account may be:
- operated as a management company under the 1940 Act;
- deregistered under the 1940 Act in the event such registration is no
longer required; or
- combined with our other separate accounts. To the extent permitted
by law, we may also transfer assets of the Separate Account to
another separate account, or to the General Account.
FIXED ACCOUNT OPTION
AMOUNTS ALLOCATED OR TRANSFERRED TO THE FIXED ACCOUNT ARE PART OF OUR
GENERAL ACCOUNT, SUPPORTING INSURANCE AND ANNUITY OBLIGATIONS. INTERESTS IN THE
FIXED ACCOUNT ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"),
AND THE FIXED ACCOUNT IS NOT REGISTERED AS AN INVESTMENT COMPANY UNDER THE 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.
A minimum balance of $500 must remain in the Fixed Account under the Fixed
Account Option. 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> 15
THE POLICY
POLICY ISSUE
Before we issue a Policy, we must receive a completed application and a
full initial premium at our home office. We ordinarily issue a Policy only for
Insureds Age 1 through 80 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 you,
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. You specify a Planned Premium payment on the application
that provides for the payment of level premiums over a specified period of time.
However, you are not required to pay Planned Premiums.
The minimum monthly premium is $50. Other minimums are: annual $600;
semi-annual $300; and quarterly $150. The amount, frequency and period of time
over which you pay 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 continuation of the Policy depends upon the Policy's Net
Surrender Value. Even if Planned Premiums are paid, the Policy will lapse any
time the Net 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 tenth 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, equal or exceed 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 subject to conditions set forth in the application, including the payment
of initial premium. If this date is the 29th, 30th, or 31st of a month, the
Policy Date will be the first day 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 you. The minimum amount of any premium that may be
allocated to a Subaccount is $50. Cash Value may be allocated to a total of
nineteen Subaccounts at any given time.
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<PAGE> 16
The Separate Account Value will vary with the investment experience of the
chosen Subaccounts. You bear 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 your 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 will charge $25 for each transfer in excess of twelve
transfers per policy year, excluding Automatic Asset Reallocation and Dollar
Cost Averaging transfers. 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, you bear the risk of loss in the event of a fraudulent
telephone transfer.
If you authorize a third party to transact transfers on your 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. You 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 your predefined
premium allocation elections. Transfers under this program are not subject to
the $500 minimum transfer limitations, limited by the fifteen day transfer
restriction nor subject to the $25 transfer charge. An election to participate
in the automatic asset reallocation program must be in writing on our form and
returned to our home office. There is currently no charge to participate in the
program.
POLICY LAPSE AND REINSTATEMENT
LAPSE. The Policy will lapse when the Net 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 Net 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, you may voluntarily repay a portion of Debt to avoid lapse. You
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 Net Surrender
Value to cover the monthly deductions, and it has not been surrendered for its
Net Surrender Value, it may be reinstated at any time within
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<PAGE> 17
three years after the date of lapse. Tax consequences may affect the decision to
reinstate. Reinstatement is subject to:
- receipt of evidence of insurability satisfactory to us;
- payment of a minimum premium sufficient to cover monthly deductions
for the grace period and to keep the Policy in force three months; and
- payment or reinstatement of any Debt which existed at the date of
termination of coverage.
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.
You select in the application one of two death benefit options: Option A or
Option B. Subject to certain restrictions, you 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.
You choose the Specified Amount on the application. The Specified Amount is
stated in the Policy Specifications. The minimum Specified Amount is $100,000.
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 Appendix A to this Prospectus and in the
Policy.
OPTION B. Under Option B, the death benefit equals the Specified Amount
plus the Cash Value (determined as of the end of the Valuation Period during
which the Insured dies) or, if greater, the Cash Value multiplied by a death
benefit percentage. The specified percentage is the same as that used in
connection with Option A. The death benefit under Option B always varies as Cash
Value varies.
EXAMPLES OF OPTIONS A AND B. The following examples demonstrate the
determination of death benefits under Options A and B. The examples show three
Policies--Policies I, II, and III--with the same Specified Amount, but different
Cash Values and assume that the Insured is Age 35 at the time of death and that
there is no outstanding Debt.
<TABLE>
<CAPTION>
POLICY I POLICY II POLICY III
-------- --------- ----------
<S> <C> <C> <C>
Specified Amount............................... $100,000 $100,000 $100,000
Cash Value on Date of Death.................... $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage....................... 250% 250% 250%
Death Benefit Under Option A................... $100,000 $125,000 $187,500
Death Benefit Under Option B................... $125,000 $150,000 $187,500
</TABLE>
Under Option A, the death benefit for Policy I equals $100,000 since the
death benefit is the greater of the Specified Amount ($100,000) or the Cash
Value at the date of death times the death benefit percentage ($25,000 X 250% =
$62,500). For both Policies II and III under Option A, the Cash Value times the
death benefit percentage ($50,000 X 250% = $125,000 for Policy II; $75,000 X
250% = $187,500 for Policy III) is greater than the Specified Amount ($100,000),
so the death benefit equals the higher value. Under Option B, the death benefit
for Policy I equals $125,000 since the death benefit is the greater of Specified
Amount plus Cash Value ($100,000 + $25,000 = $125,000) or the Cash Value times
the death benefit percentage ($25,000 X 250% = $62,500). Similarly, in Policy
II, Specified Amount plus Cash Value ($100,000 + $50,000 = $150,000) is greater
than Cash Value times the death benefit percentage ($50,000 X 250% = $125,000).
In Policy III, the Cash Value
15
<PAGE> 18
times the death benefit percentage ($75,000 X 250% = $187,500) is greater than
the Specified Amount plus Cash Value ($100,000 + $75,000 = $175,000), so the
death benefit equals the higher value.
All calculations of death benefit are made as of the end of the Valuation
Period during which the Insured dies. Death benefit proceeds may be paid to a
Beneficiary in a lump sum or under the Policy's settlements options.
Death Benefits ordinarily are paid within seven days after we receive all
required documentation. Payments may be postponed in certain circumstances. (See
"General Provisions--Postponement of Payments".)
CHANGES IN DEATH BENEFIT OPTION
After the first Policy Year, you 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 the Cash Value will then be
added to the new Specified Amount, and the death benefit then varies with the
Cash Value. We may require evidence of insurability before we accept a change in
the death benefit from Option A to Option B.
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 the Cash Value.
(See "Charges and Deductions--Cost of Insurance Charge.") If the death benefit
does not equal the 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, you 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 80. 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 your 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 your 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 $100,000. 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, or
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<PAGE> 19
- our determination that the decrease would cause the Policy to
terminate because the distributions from Cash Value required under
the tax code to effect the decrease exceed Net 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 Owner is not the Insured, we
require the Insured's consent.
BENEFITS AT MATURITY
If the Insured is alive on the Policy Date anniversary nearest the
Insured's 100th birthday, we pay the Owner the Surrender Value of the Policy. On
the Maturity Date, the Policy terminates and we have no further obligations
under the Policy except as provided in the Extended Maturity Option Rider.
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, and
- Policy charges.
You may make partial withdrawals of Cash Value or surrender the Policy and
receive the Policy's Net Surrender Value. (See "Surrender Privilege.") The Cash
Value is not guaranteed.
CALCULATION OF CASH VALUE. Cash Value is the total of:
- Separate Account Value,
- Fixed Account value, and
- 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 net 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) Any 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) Any amounts transferred from the Subaccount during the current
Valuation Period; minus
(6) Any amounts withdrawn from the Subaccount during the current
Valuation Period; minus
(7) Any 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%.
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<PAGE> 20
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.
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 Portfolio. 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, you may borrow all or part of the Policy's
maximum loan amount. The maximum loan amount is 90% of Surrender Value. The
amount of any new loan may not exceed the maximum loan amount less Debt on the
date a loan is granted. Loan interest is charged at an effective annual rate of
4.5%.
PREFERRED LOANS. After the first Policy Year, the Policy Owner may borrow
an amount up to the earnings in the Policy subject to any previous indebtedness.
Interest on a preferred loan is charged at an effective annual rate of 3%.
The minimum amount of any loan is $500. The loan ordinarily is paid within
seven 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 you direct
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.
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. You
must specify that the purpose of a payment is loan repayment; otherwise a
payment is treated as premium. At the time of repayment, the Loan Account is
reduced by the repayment amount, adjusted for the difference between interest
charged and interest earned. The net repayment amount is allocated to the
Subaccounts and the Fixed Account, according to your
18
<PAGE> 21
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 the Net Surrender Value and,
therefore, the amount available to pay Policy charges. If the Net Surrender
Value on the day preceding a Monthly Processing Date is less than the next
monthly deductions we will notify you. (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 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, you may surrender the Policy for its Surrender
Value. To surrender the Policy, you must return the Policy to us, along with a
written request. The Net Surrender Value equals Surrender Value, minus any Debt.
The Surrender Value equals the Cash Value minus any applicable surrender charge.
(See "Surrender Charge.")
PARTIAL WITHDRAWALS. After the first Policy Year, you may withdraw a
portion of Surrender Value. The minimum amount of each withdrawal is $500. The
maximum withdrawal is limited to 10% of Net Surrender Value during the surrender
charge period. We will charge $25 for each partial withdrawal taken in excess of
one per Policy Year, except those withdrawals under the Systematic Withdrawal
Plan. This charge reimburses us for the administrative expense related to the
withdrawal. This charge is deducted after the partial withdrawal amount is
determined. (See "Charges and Deductions.") A withdrawal decreases Cash Value by
the amount of the withdrawal and, if Death Benefit Option A is in effect,
reduces Specified Amount by the amount of the withdrawal.
FREE-LOOK PERIOD AND EXCHANGE RIGHTS
During the Free-Look Period, you 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 you receive the Policy, or, 45 days after you
complete 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. This amount will
be at least equal to premiums paid. To receive a refund you 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, you may
exchange the Policy for a non-variable permanent fixed benefit life insurance
policy then currently offered by us or an affiliate. Evidence of insurability is
not required. The amount of the new policy may be, at your election, 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 sales load of 2.5% from each premium before the net premium is
allocated. Additionally, 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 Internal Revenue Code.
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<PAGE> 22
We expect to recover total premium tax expenses over the life of the
Policies from aggregate tax charges and the unamortized state premium tax charge
portion of the surrender charge. However, the amount of premium taxes differs
from state to state and some states have no premium tax. Accordingly, the amount
of these charges paid under your Policy may be more or less than the premium
taxes we actually pay with respect to your Policy.
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 under the Subaccounts
and withdrawing amounts from the Fixed Account 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 monthly 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 divided by 1.0024663, 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
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 a current annual rate of .60% for the first
ten Policy Years, .40% for Policy Years eleven through twenty, and .20% for
Policy Years twenty-one and thereafter, from the Subaccounts for mortality and
expense risks we assume. We guarantee an annual rate of .60% for all Policy
Years.
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 Owners. This charge is designed only to
reimburse us for actual administrative expenses. For the first Policy Year, this
charge is $10 per month. In Policy Years two and thereafter it is anticipated
that the charge will be $6 per month, however, should these expenses exceed
those currently assumed, the charge may be increased up to $7.50 per month.
OTHER CHARGES
SURRENDER CHARGE. We deduct a surrender charge from the Cash Value if the
Policy is surrendered or Cash Value is applied under a settlement option during
the first ten Policy Years. A surrender charge is also assessed during the first
ten Policy Years following an increase in Specified Amount.
1. The amount of the surrender charge for the initial Specified Amount is
the product of a. times b. times c. where:
a. is the initial Specified Amount (in 1,000s);
b. is the surrender target premium rate as shown in Appendix B; and
c. is the surrender charge percentage for the applicable Policy Year as
shown below.
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<PAGE> 23
During the ten 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 increase, years commencing on the date of
the increase and surrender target premium associated with the increase.
2. The amount of the surrender charge for each increase in the Specified
Amount is the product of a. times b. times c. where:
a. is the amount of increase in Specified Amount for the base plan (in
1,000s);
b. is the surrender target premium rate as shown in Appendix B; and
c. is the surrender charge percentage for the applicable Policy Year as
shown below.
The surrender charge is the sum of the amounts in 1. and 2. above. The
surrender charge is not reduced by any decrease in Specified Amount.
The applicable surrender target premium rate depends on the Insured's age
at issue, sex, tobacco status, and underwriting rate class. See Appendix B.
SURRENDER CHARGE PERCENTAGES:
<TABLE>
<CAPTION>
Policy Year Percentages
- ----------- -----------
<S> <C>
1-5 100%
6 80%
7 60%
8 45%
9 30%
10 15%
11+ 0%
</TABLE>
PARTIAL WITHDRAWAL CHARGE. We will charge $25 for each partial withdrawal
in a Policy Year after the first withdrawal. This charge reimburses us for the
administrative expenses related to the withdrawal. However, the partial
withdrawal charge does not apply to those under the Systematic Withdrawal Plan.
TRANSFER CHARGE. We will charge up to $25 for each transfer in excess of
twelve transfers per Policy Year, excluding Automatic Asset Reallocation and
Dollar Cost Averaging transfers. 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, including 12b-1 distribution fees. Investment
advisory fees and expenses differ with respect to each of the Portfolios. (See
"The Funds.")
For additional information about the fees and expenses of the Funds, see
"The Funds", page 9, and the Fund prospectuses accompanying this Prospectus, and
Statements of Additional Information available from us upon request.
The Fund(s) may pay 12b-1 service fees to us or our affiliates for support
or distribution services relating to Fund shares. We may receive compensation
from the investment advisers for administrative services related to the Funds.
This compensation will be consistent with the services rendered or the cost
savings resulting from the arrangement. For more information concerning
investment advisory fees and other charges against the Portfolios, see the
Funds' prospectuses accompanying this Prospectus and Statements of Additional
Information available from us upon request.
SYSTEMATIC WITHDRAWAL PLAN. An initial 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 credit additional
amounts in special circumstances that result in lower sales, administrative, or
mortality expenses. For example, special circumstances may
21
<PAGE> 24
exist in connection with group or sponsored arrangements, sales to our existing
policyowners, sales to employees or clients of members of the ZFS group of
companies, or employees and registered representatives (and their families) of
broker-dealers (or their affiliated financial institutions) that have entered
into selling group agreements with Investors Brokerage Services, Inc., the
distributor of the Policies. The amounts of any reductions will reflect the
reduced sales effort and administrative costs resulting from, or the different
mortality experience expected as a result of, the special circumstances.
Reductions will not unfairly discriminate against any person, including the
affected Owners and owners of all other policies funded by the Separate Account.
GENERAL PROVISIONS
SETTLEMENT OPTIONS
You, or the Beneficiary at the death of the Insured if no election by you
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 Net 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--FIXED INSTALLMENT ANNUITY. We pay income for the period and
payment mode elected. The period elected must be at least 5 years, but not more
than 30 years.
OPTION 2--LIFE ANNUITY. We pay monthly income to the payee during the
payee's lifetime. If this Option is elected, annuity payments terminate
automatically and immediately on the death of the payee without regard to the
number or total amount of payments made. Thus, it is possible for an individual
to receive only one payment if death occurred prior to the date the second
payment was due.
OPTION 3--LIFE ANNUITY WITH INSTALLMENTS GUARANTEED. We pay monthly income
for the guaranteed period elected and thereafter for the remaining lifetime of
the payee. The available guaranteed periods are 5, 10, 15 or 20 years.
OPTION 4--JOINT AND SURVIVOR ANNUITY. We pay the full monthly income while
both payees are living. Upon the death of either payee, the income continues
during the lifetime of the surviving payee. The surviving payee's income is
based on the percentage designated (50%, 66 2/3%, 75% or 100%) at election time.
Payments terminate automatically and immediately upon the death of the surviving
payee without regard to the number or total amount of payments received.
We must consent to any other payment methods.
The guaranteed monthly payments are based on an interest rate of 2.50% per
year and, where mortality is involved, the "1983 Table a" individual mortality
table developed by the Society of Actuaries, with a 5 year setback.
POSTPONEMENT OF PAYMENTS
GENERAL. Payment of any amount due upon: (a) Policy termination at the
Maturity Date, (b) surrender of the Policy, (c) payment of any Policy loan, or
(d) death of the Insured, may be postponed whenever:
(1) The New York Stock Exchange is closed other than customary weekend
and holiday closings, or trading on the New York Stock Exchange is
restricted as determined by the Commission;
(2) The Commission by order permits postponement for the protection of
owners; or
(3) An emergency exists, as determined by the Commission, as a result
of which disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the net assets of the
Separate Account.
Transfers may also be postponed under these circumstances.
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<PAGE> 25
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 you and KILICO. 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.
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, your rights and the rights of the 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
You may designate a new Owner while the Insured is alive.
You designate primary and secondary Beneficiaries in the application. We
rely upon the latest filed change of beneficiary. If the Insured dies, and no
designated Beneficiary is alive at that time, we will pay the Insured's estate.
The interest of any Beneficiary may be subject to that of an assignee.
In order to change the Owner or a designated Beneficiary, you must sign our
form. The change is effective when you sign 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 you, at your 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>
23
<PAGE> 26
We also send you confirmations and acknowledgments of various transactions,
as well as annual and semi-annual Fund reports.
WRITTEN NOTICES AND REQUESTS
Send written notices or requests to our home office: Kemper Investors Life
Insurance Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049.
Please include the Policy number and the Insured's full name. We send notices to
your 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 premium 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,
- other insured rider, and
- extended maturity rider.
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.
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. You may enroll any time by completing our
Dollar Cost Averaging form. Transfers are made on the tenth day of the month, or
the next business day if the tenth falls on a weekend. We must receive the
enrollment form at least five business days before the transfer date.
Transfers commence on the first transfer date following the Trade Date. The
minimum transfer amount is $100 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 your written termination at least five business days before
the next transfer date, or
- the Policy is surrendered.
There is currently no charge to participate in the Dollar Cost Averaging
program. We will give 30 days notice if we amend the Dollar Cost Averaging
program. We may terminate the program at any time.
You 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, you may have Cash Value in the
Fixed Account and no more than eight non-DCA Subaccounts.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing you to preauthorize
periodic withdrawals after the first Policy Year. You instruct us to withdraw
selected amounts from the Fixed Account, or up to two Subaccounts, on a monthly,
quarterly, semi-annual or annual basis. Your 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".) The
$25 withdrawal charge does not apply. However, we charge $50 to
24
<PAGE> 27
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 us or from your
representative. We will give 30 days notice if we amend the SWP. The SWP may be
terminated at any time by you or us.
DISTRIBUTION OF POLICIES
Investors Brokerage Services, Inc. ("IBS") serves as distributor of the
Policies. IBS is located at 1 Kemper Drive, Long Grove, Illinois 60049. IBS is
our wholly-owned subsidiary. It is registered as a broker-dealer under the
Securities Exchange Act of 1934 (the "1934 Act"), and is a member of the
National Association of Securities Dealers, Inc. ("NASD").
The Policy is sold by licensed insurance representatives who represent us
and who are registered representatives of broker-dealers that are registered
under the 1934 Act and are members of the NASD.
The maximum sales commission payable to registered representatives is
approximately 70% 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 five. 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.
The distribution agreement with IBS provides for indemnification of IBS by
KILICO and the Separate Account for liability arising out of allegedly untrue
statements in, or omissions of material fact from, the prospectus or the
Registration Statement. IBS agrees to indemnify KILICO and the Separate Account
against claims arising from the conduct of IBS or unaffiliated broker-dealers
that sell Policies.
FEDERAL TAX MATTERS
INTRODUCTION
This discussion of the federal income tax treatment of the Policy is not
exhaustive, does not 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 the courts.
This discussion does not address state or local tax consequences, nor
federal estate or gift 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.
25
<PAGE> 28
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 and earnings thereon, 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 you,
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 you will be taxed 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 a segregated asset
account such as the Separate Account. Income and gains from the Separate Account
would then be includible in your gross income. The Internal Revenue Service
("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 over such assets. As of the date of this Prospectus,
no comprehensive guidance has been issued by the IRS clarifying the
circumstances when such investment control by a variable contract owner would
exist. As a result, your right to allocate Cash Values among the Subaccounts may
cause you to be considered the owner of the assets of the Separate Account.
We do not know what limits may be set forth in any guidance that the IRS
may issue, or whether any such limits will apply to existing Policies. We
therefore 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 the beneficiary's 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.
TAX DEFERRAL DURING ACCUMULATION PERIOD. Any increase in Cash Value is
generally not taxable to you 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 your ordinary income. The "investment in the contract" generally
is premium payments minus non-taxable distributions. As described below, the tax
treatment of amounts distributed, including loans, while the Insured is alive
depends upon whether your Policy is a "modified endowment contract" ("MEC"). The
term "modified endowment contract," or "MEC," is defined below.
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 you if the Policy remains in force. However, when the
26
<PAGE> 29
interest rate credited to the Loan Account is the same as the interest rate
charged for the loan (preferred loan), it is unclear whether the IRS would
consider some or all of the loan proceeds to be includible in income. Absent
further guidance, we will treat all loans, including preferred loans, as
indebtedness. 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.
Generally, interest paid on Policy Loans or other indebtedness related to
the Policy will not be tax deductible, except in the case of certain
indebtedness under a Policy covering a "key person." A tax adviser should be
consulted before taking any Policy Loan.
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 on or 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 first 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. You 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 to
the extent that the Cash Value exceeds the investment in the contract. A Policy
loan is treated as a withdrawal for tax purposes.
If you assign or pledge Cash Value under a MEC (or agree 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, you
should consult a 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 you attain age 59 1/2, (2) because you
have become disabled (as defined in the Code), or (3) as substantially equal
periodic payments over your life or life expectancy (or the joint lives or life
expectancies of you and your beneficiary, within the meaning of the law).
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 always clear; however, it could affect the taxable amount of
a withdrawal (or a deemed withdrawal) and could subject the withdrawal to the
10% penalty tax.
CONSIDERATIONS APPLICABLE TO BOTH MECS AND NON-MECS
LOSS OF INTEREST DEDUCTION WHERE POLICIES ARE HELD BY OR FOR THE BENEFIT OF
CORPORATIONS, TRUSTS, ETC. If an entity (such as a corporation or a trust, not
an individual) purchases a Policy or is the beneficiary of a Policy issued after
June 8, 1997, a portion of the interest on indebtedness unrelated to the Policy
may not be deductible by the entity. However, this rule does not apply to a
Policy owned by an entity engaged in a trade or business which covers the life
of only one individual who is (a) a 20 percent owner of the entity, or (b) an
officer, director, or employee of the trade or business, at the time first
covered by the Policy. Entities that are considering purchasing the Policy, or
that will be Beneficiaries under a Policy, should consult a tax adviser.
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. The exchange of one life
insurance contract for another life insurance contract generally is not taxed
(unless cash is distributed or a loan is reduced or forgiven). The insured under
the new contract must be the same as the insured under the old contract.
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<PAGE> 30
FEDERAL INCOME TAX WITHHOLDING
We withhold and send to the federal government a part of the taxable
portion of withdrawals unless you notify us in writing at the time of withdrawal
that you are electing no withholding. You are always responsible for the payment
of any taxes and early distribution penalties that may be due on the amounts
received. You may also be required to pay penalties under the estimated tax
rules, if your withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
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 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 an 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.
We vote all Fund shares held in the Separate Account proportionately based
on 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. In addition, we may disregard voting
instructions in favor of changes initiated by an Owner in the investment policy
or the investment adviser of a Portfolio 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 Owners.
STATE REGULATION OF KILICO
KILICO, a stock life insurance company organized under the laws of
Illinois, is subject to regulation by the Illinois Department of Insurance. 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.
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.
28
<PAGE> 31
KILICO'S DIRECTORS AND OFFICERS
Our directors and principal officers are listed below together with their
current positions and their other business experience during the past five
years. The address of each officer and director is 1 Kemper Drive, Long Grove,
Illinois 60049.
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Gale K. Caruso (42) President and Chief Executive Officer of Federal Kemper Life
President and Chief Executive Officer Assurance Company ("FKLA"), Fidelity Life Association
since June 1999. Director since July ("FLA"), Zurich Life Insurance Company of America ("ZLICA")
1999. and Zurich Direct, Incorporated ("ZD") since June 1999.
Director of FKLA, FLA and ZLICA since July 1999. Chairman,
President and Chief Executive Officer of Scudder Canada
Investor Services, Ltd. from 1995 to June 1999. Managing
Director of Scudder Kemper Investments, Inc. from July 1986
to June 1999.
Eliane C. Frye (52) Executive Vice President of FKLA and FLA since March 1995.
Executive Vice President since March Executive Vice President of ZLICA and ZD since March 1996.
1995. Director since May 1998. Director of FLA since December 1997. Director of FKLA and
ZLICA since May 1998. Director of ZD from March 1996 to
March 1997. Director of IBS and IBSIA since 1995. Senior
Vice President of KILICO, FKLA and FLA from 1993 to 1995.
Vice President of FKLA and FLA from 1988 to 1993.
Frederick L. Blackmon (48) 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 and ZD since
March 1996. Director of FLA since May 1998. Director of ZD
from March 1996 to March 1997. Treasurer and Chief Financial
Officer of Kemper since January 1996. Chief Financial
Officer of Alexander Hamilton Life Insurance Company from
April 1989 to November 1995.
Russell M. Bostick (43) Senior Vice President and Chief Information Officer of FKLA,
Senior Vice President and Chief FLA, ZLICA and ZD since March 1999. Vice President and Chief
Information Officer since March 1999. Information Officer of FKLA, FLA, KILICO, ZLICA and ZD from
April 1998 to March 1999. Chief Technology Officer of
Corporate Software & Technology from June 1997 to April
1998. Vice President, Information Technology Department of
CNA Insurance Companies from January 1995 to June 1997.
James C. Harkensee (41) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA and ZD since 1995. Director
1996. of ZD from April 1993 to March 1997 and since March 1998.
Vice President of ZLICA from 1992 to 1995. Vice President of
ZD from 1994 to 1995.
James E. Hohmann (44) Senior Vice President of FKLA since December 1995. Chief
Senior Vice President since December Actuary of FKLA and KILICO from December 1995 to January
1995. Director since May 1998. 1999. Senior Vice President of FLA since January 1996. Chief
Actuary of FLA from January 1996 to January 1999. Senior
Vice President of ZLICA and ZD since March 1996. Chief
Actuary of ZLICA and ZD from March 1996 to January 1999.
Director of FLA since June 1997. Director of FKLA and ZLICA
since May 1998. Director of ZD from March 1996 to March
1997. Managing Principal (Partner) of Tillinghast-Towers
Perrin from January 1991 to December 1995.
Edward K. Loughridge (45) 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>
29
<PAGE> 32
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Debra P. Rezabek (44) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996. FKLA and FLA since 1995. General Counsel and Director of
Government Affairs of FKLA and FLA since 1992 and of KILICO
since 1993. Senior Vice President, General Counsel and
Corporate Secretary of ZLICA and 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. General Counsel and Assistant Secretary of
KILICO, FKLA and FLA from 1992 to 1996. Assistant Secretary
of Kemper since January 1996.
Edward L. Robbins (60) Senior Vice President and Chief Actuary of FKLA, FLA, ZLICA
Senior Vice President and Chief and ZD since March 1999. Senior Actuary of FKLA, FLA,
Actuary since March 1999. KILICO, ZLICA and ZD from July 1998 to March 1999. Principal
of KPMG Peat Marwick LLP from May 1984 to July 1998.
Kenneth M. Sapp (54) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Senior Vice President of ZD since March 1998. Director
1998. of IBS since May 1998. Director of IBSIA since September
1998. Vice President--Aetna Life Brokerage of Aetna Life &
Annuity Company from February 1992 to January 1998.
George Vlaisavljevich (57) 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.
William H. Bolinder (56) Director of FKLA and FLA since January 1996. Director of
Chairman of the Board from January ZLICA and ZD since March 1995. Chairman of the Board of FKLA
1996 to June 1999 and since April and FLA from January 1996 to June 1999 and since April 2000.
2000. Director since January 1996. Chairman of the Board of ZLICA and ZD from March 1995 to
June 1999 and since April 2000. Chairman of the Board and
Director of Kemper since January 1996. Director of SKI since
January 1996. Vice Chairman of SKI from January 1996 to
1998. Member of the Group Executive Board of Zurich
Financial Services Group since 1998. Member of the Corporate
Executive Board of Zurich Insurance Group from October 1994
to 1998. Chairman of Zurich American Insurance Company since
1998. Chairman of the Board of American Guarantee and
Liability Insurance Company, Zurich American Insurance
Company of Illinois, American Zurich Insurance Company and
Steadfast Insurance Company since 1995. Chief Executive
Officer of American Guarantee and Liability Insurance
Company, Zurich American Insurance Company of Illinois and
American Zurich Insurance Company from 1986 to June 1995.
President of Zurich Holding Company of America ("ZHCA")
since 1995. Vice Chairman of ZHCA since 1996. Underwriter
for Zurich American Lloyds since 1986.
David A. Bowers (53) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich U.S. since August
1985. Vice President, General Counsel and Secretary of
Kemper since January 1996.
Gunther Gose (55) Director of FKLA, FLA and ZLICA since November 1998. Chief
Director since November 1998. Financial Officer and Member of the Group Executive Board of
Zurich Financial Services since October 1998. Member of the
Corporate Executive Board of Zurich Insurance Group from
April 1990 to October 1998.
</TABLE>
30
<PAGE> 33
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 LLP, 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.
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1999 and 1998
and the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1999, 1998
and 1997 have been included herein and in the registration statement in reliance
upon the report of PricewaterhouseCoopers LLP, independent accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The statements of assets and liabilities and policy owners' equity of the
KILICO Variable Separate Account as of December 31, 1999 and the related
statements of operations for the year then ended and the statements of changes
in policy owners' equity for each of the two years then ended and for each of
the periods presented has been included herein in reliance upon the report of
PricewaterhouseCoopers LLP, independent 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 (SEC) 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 or at the SEC's website at http://www.sec.gov.
FINANCIAL STATEMENTS
The included financial statements of the Subaccounts of the Separate
Account do not reflect any assets attributable to the Policy, because we did not
sell the Policy during the periods covered by those financial statements.
Instead, those financial statements solely reflect assets and operations
attributable to sales of other variable life insurance contracts issued by the
Separate Account. The financial statements do not cover certain Subaccounts of
the Separate Account, because there were no assets in those Subaccounts as of
the end of the periods covered. The included financial statements for KILICO
only bear on our ability to meet our obligations under the Policy. They do not
relate to the investment performance of the assets held in the Separate Account.
31
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of Kemper Investors Life Insurance Company and
Policy Owners of Kemper Investors Life Insurance Company's
KILICO Variable Separate Account
In our opinion, the accompanying statements of assets and liabilities and
policy owners' equity and the related statements of operations and changes in
policy owners' equity present fairly, in all material respects, the financial
position of the subaccounts of Kemper Investors Life Insurance Company's (the
"Company") KILICO Variable Separate Account, which includes the Fidelity VIP
Equity-Income Subaccount, Fidelity VIP High Income Subaccount (investment
options within the Fidelity Variable Insurance Products Fund), Scudder VLIF
Growth and Income Subaccount and Scudder VLIF International Subaccount
(investment options within the Scudder Variable Life Investment Fund), Kemper
Government Securities Subaccount, Kemper Money Market Subaccount, Kemper Small
Cap Growth Subaccount, and Kemper Total Return Subaccount (investment options
within the Kemper Variable Series, formerly Investors Fund Series), thereof at
December 31, 1999, and the results of their operations for the year then ended
and the changes in their policy owners' equity for each of the two years then
ended, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included direct confirmation of investments owned at December 31,
1999 provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 24, 2000
32
<PAGE> 35
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33
<PAGE> 36
KILICO VARIABLE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUND
-----------------------------
FIDELITY VIP FIDELITY VIP
EQUITY-INCOME HIGH INCOME
SUBACCOUNT SUBACCOUNT
------------- ------------
<S> <C> <C>
ASSETS
Investments in underlying portfolio funds, at current
value.................................................. $126 14
Dividends and other receivables........................... -- --
---- --
Total assets...................................... 126 14
---- --
LIABILITIES AND POLICY OWNERS' EQUITY
Liabilities:
Mortality and expense risk charges..................... -- --
Other payables......................................... -- --
---- --
Total liabilities................................. -- --
---- --
Policy owners' equity..................................... $126 14
==== ==
ANALYSIS OF POLICY OWNERS' EQUITY
Excess of proceeds from units sold over payments for units
redeemed............................................... $125 14
Accumulated net investment income......................... -- --
Accumulated net realized gain on sales of investments..... 1 --
Unrealized appreciation (depreciation) of investments..... -- --
---- --
Policy owners' equity..................................... $126 14
==== ==
</TABLE>
- ---------------
*Formerly Investors Fund Series
See accompanying notes to financial statements.
34
<PAGE> 37
<TABLE>
SCUDDER VARIABLE LIFE KEMPER VARIABLE SERIES*
INVESTMENT FUND --------------------------------------------------------------
--------------------------------- KEMPER
SCUDDER VLIF SCUDDER VLIF GOVERNMENT KEMPER KEMPER KEMPER
GROWTH AND INCOME INTERNATIONAL SECURITIES MONEY MARKET SMALL CAP GROWTH TOTAL RETURN
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- ------------ ---------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
69 93 4,307 1,937 2,174 3,468
-- -- -- 5 -- --
-- -- ----- ----- ----- -----
69 93 4,307 1,942 2,174 3,468
-- -- ----- ----- ----- -----
-- -- 3 1 2 3
-- -- -- 10 1 --
-- -- ----- ----- ----- -----
-- -- 3 11 3 3
-- -- ----- ----- ----- -----
69 93 4,304 1,931 2,171 3,465
== == ===== ===== ===== =====
69 68 1,799 1,274 1,460 254
1 2 2,046 657 43 1,998
-- 1 578 -- 25 1,012
(1) 22 (119) -- 643 201
-- -- ----- ----- ----- -----
69 93 4,304 1,931 2,171 3,465
== == ===== ===== ===== =====
</TABLE>
35
<PAGE> 38
KILICO VARIABLE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUND
----------------------------
FIDELITY VIP FIDELITY VIP
EQUITY- HIGH
INCOME INCOME
SUBACCOUNT SUBACCOUNT
------------ ------------
<S> <C> <C>
REVENUE
Dividends and capital gains distributions................. $1 --
EXPENSES
Mortality and expense risk charges........................ 1 --
-- --
Net investment income (loss).............................. -- --
-- --
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on sales of investments................. 1 --
Change in unrealized appreciation (depreciation) of
investments............................................ -- --
-- --
Net realized and unrealized gain (loss) on investments...... 1 --
-- --
Net increase (decrease) in policy owners' equity resulting
from operations........................................... $1 --
== ==
</TABLE>
- ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
36
<PAGE> 39
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND KEMPER VARIABLE SERIES*
------------------------------------- ---------------------------------------------------
SCUDDER VLIF KEMPER KEMPER KEMPER
GROWTH AND SCUDDER VLIF GOVERNMENT MONEY SMALL CAP KEMPER
INCOME INTERNATIONAL SECURITIES MARKET GROWTH TOTAL RETURN
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- ----------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
2 3 219 63 -- 326
1 1 40 24 14 26
-- -- ---- -- --- ---
1 2 179 39 (14) 300
-- -- ---- -- --- ---
-- 1 -- -- 13 196
(1) 22 (189) -- 550 (16)
-- -- ---- -- --- ---
(1) 23 (189) -- 563 180
-- -- ---- -- --- ---
-- 25 (10) 39 549 480
== == ==== == === ===
</TABLE>
37
<PAGE> 40
KILICO VARIABLE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIDELITY VARIABLE
INSURANCE PRODUCTS FUND
----------------------------
FIDELITY VIP FIDELITY VIP
EQUITY- HIGH
INCOME INCOME
SUBACCOUNT SUBACCOUNT
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income (loss).............................. $ -- --
Net realized gain on sales of investments................. 1 --
Change in unrealized appreciation (depreciation) of
investments............................................ -- --
---- --
Net increase (decrease) in policy owners' equity
resulting from operations............................. 1 --
---- --
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.................................. 81 11
Net transfers (to) from affiliate and subaccounts......... 48 5
Payments for units redeemed............................... (23) (4)
---- --
Net increase (decrease) in policy owners' equity from
account unit transactions............................. 106 12
---- --
Total increase (decrease) in policy owners' equity.......... 107 12
POLICY OWNERS' EQUITY
Beginning of year......................................... 19 2
---- --
End of year............................................... $126 14
==== ==
</TABLE>
- ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
38
<PAGE> 41
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND KEMPER VARIABLE SERIES*
------------------------------------- ---------------------------------------------------
SCUDDER VLIF KEMPER KEMPER KEMPER
GROWTH AND SCUDDER VLIF GOVERNMENT MONEY SMALL CAP KEMPER
INCOME INTERNATIONAL SECURITIES MARKET GROWTH TOTAL RETURN
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- ----------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
1 2 179 39 (14) 300
-- 1 -- -- 13 196
(1) 22 (189) -- 550 (16)
--- --- ----- ------ ------ -----
-- 25 (10) 39 549 480
--- --- ----- ------ ------ -----
55 44 33 5,456 988 97
26 29 (44) (1,180) (60) (358)
(18) (13) (68) (3,350) (388) (433)
--- --- ----- ------ ------ -----
63 60 (79) 926 540 (694)
--- --- ----- ------ ------ -----
63 85 (89) 965 1,089 (214)
6 8 4,393 966 1,082 3,679
--- --- ----- ------ ------ -----
69 93 4,304 1,931 2,171 3,465
=== === ===== ====== ====== =====
</TABLE>
39
<PAGE> 42
KILICO VARIABLE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUND
------------------------------
FIDELITY VIP FIDELITY VIP
EQUITY-INCOME HIGH INCOME
SUBACCOUNT(A) SUBACCOUNT(A)
------------- -------------
<S> <C> <C>
OPERATIONS
Net investment income..................................... $-- --
Net realized gain (loss) on sales of investments.......... -- --
Change in unrealized appreciation (depreciation) of
investments............................................ -- --
--- ---
Net increase in policy owners' equity resulting from
operations............................................ -- --
--- ---
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.................................. 11 --
Net transfers (to) from affiliate and subaccounts......... 10 2
Payments for units redeemed............................... (2) --
--- ---
Net increase (decrease) in policy owners' equity from
account unit transactions............................. 19 2
--- ---
Total increase (decrease) in policy owners' equity.......... 19 2
POLICY OWNERS' EQUITY
Beginning of period....................................... -- --
--- ---
End of period............................................. $19 2
=== ===
</TABLE>
- ---------------
* Formerly Investors Fund Series
(a) For the period June 15, 1998 (commencement of operations) to December 31,
1998.
See accompanying notes to financial statements.
40
<PAGE> 43
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE
INVESTMENT FUND KEMPER VARIABLE SERIES*
---------------------------------- --------------------------------------------------------------
KEMPER
SCUDDER VLIF SCUDDER VLIF GOVERNMENT KEMPER KEMPER KEMPER
GROWTH AND INCOME INTERNATIONAL SECURITIES MONEY MARKET SMALL CAP GROWTH TOTAL RETURN
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- ------------- ---------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
-- -- 232 66 55 489
-- -- 284 -- 12 (67)
-- -- (253) -- 75 (1)
-- -- ----- ------ ----- -----
-- -- 263 66 142 421
-- -- ----- ------ ----- -----
4 2 32 5,791 590 63
4 7 (399) (2,163) 318 638
(2) (1) (200) (3,694) (192) (479)
-- -- ----- ------ ----- -----
6 8 (567) (66) 716 222
-- -- ----- ------ ----- -----
6 8 (304) -- 858 643
-- -- 4,697 966 224 3,036
-- -- ----- ------ ----- -----
6 8 4,393 966 1,082 3,679
== == ===== ====== ===== =====
</TABLE>
41
<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 an indirect, wholly-owned subsidiary of Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG is listed on the
Swiss Market Index (SMI) Allied Zurich p.l.c. is included in the FTSE-100 Share
Index in London.
The Separate Account is used to fund policies ("Policy") for the Kemper
Select variable universal life policies ("Kemper Select"), the Power V flexible
premium variable universal life policies ("Power V"), the Farmers Variable
Universal Life I flexible premium variable life policies ("Farmers Variable
Universal Life I") and Kemper Destinations Life modified single premium variable
universal life policies ("Kemper Destinations Life"). The Separate Account is
divided into fifty-eight subaccount options available to Policy Owners depending
upon their respective Policy. The Kemper 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 Kemper Variable Series (formerly
Investors Fund Series), an open-end diversified management investment company.
The Power V policies have twenty-three subaccounts which are available to Policy
Owners and each subaccount invests exclusively in the shares of a corresponding
portfolio of the Kemper Variable Series, the American Skandia Trust, the
Fidelity Variable Insurance Products Fund, the Fidelity Variable Insurance
Products Fund II, the Fidelity Variable Insurance Products Fund III and the
Scudder Variable Life Investment Fund (Class B Shares), all of which are
open-end diversified management investment companies. The Farmers Variable
Universal Life I policies have twelve subaccounts which are available to Policy
Owners and each subaccount invests exclusively in the shares of a corresponding
portfolio of the Kemper Variable Series, the Janus Aspen Series, the PIMCO
Variable Insurance Trust, the Templeton Variable Products Series Fund (Class 2
Shares) and the Scudder Variable Life Investment Fund (Class A Shares), all of
which are open-end diversified management investment companies. The Kemper
Destinations Life policies have thirty-seven subaccounts which are available to
Policy Owners and each subaccount invests exclusively in the shares of a
corresponding portfolio of the Kemper Variable Series, the Scudder Variable Life
Investment Fund (Class A Shares), The Alger American Fund, The Dreyfus Socially
Responsible Growth Fund, Inc., the Dreyfus Investment Portfolios and the Warburg
Pincus Trust, all of which are open-end diversified management investment
companies.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that could affect the reported amounts of assets and
liabilities as well as the disclosure of contingent amounts at the date of the
financial statements. As a result, actual results reported as income and
expenses could differ from the estimates reported in the accompanying financial
statements.
SECURITY VALUATION
The investments are stated at current value which is based on the closing
bid price, net asset value, at December 31, 1999.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are generally 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
generally reported on a first in, first out (FIFO) cost basis.
ACCUMULATION UNIT VALUATION
On each day the New York Stock Exchange (the "Exchange") is open for
trading, the accumulation unit value is determined as of the earlier of 3:00
p.m. (Central time) or the close of the Exchange by dividing the total value of
each subaccount's investments and other assets, less liabilities, by the number
of accumulation units outstanding in the respective subaccount.
42
<PAGE> 45
FEDERAL INCOME TAXES
The operations of the Separate Account are included in the federal income
tax return of KILICO. Under existing federal income tax law, investment income
and realized capital gains and losses of the Separate Account increase
liabilities under the policy and are, therefore, not taxed. Thus the Separate
Account may realize net investment income and capital gains and losses without
federal income tax consequences.
(2) SUMMARY OF INVESTMENTS
Investments as of December 31, 1999 do not include any amounts attributable
to Kemper Destinations Life because sales had not commenced prior to December
31, 1999.
Investments, at cost, at December 31, 1999, are as follows (in thousands,
differences are due to rounding):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------ -------
<S> <C> <C>
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
Fidelity VIP Equity-Income Subaccount....................... 5 $ 126
Fidelity VIP High Income Subaccount......................... 1 14
SCUDDER VARIABLE LIFE INVESTMENT FUND:
Scudder VLIF Growth and Income Subaccount................... 6 70
Scudder VLIF International Subaccount....................... 5 71
KEMPER VARIABLE SERIES:
Kemper Government Securities Subaccount..................... 3,724 4,426
Kemper Money Market Subaccount.............................. 1,937 1,937
Kemper Small Cap Growth Subaccount.......................... 819 1,531
Kemper Total Return Subaccount.............................. 1,203 3,267
-------
TOTAL INVESTMENTS AT COST.............................. $11,442
=======
</TABLE>
A description of the underlying investments are summarized below.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VIP EQUITY-INCOME SUBACCOUNT: This subaccount invests in the
Fidelity VIP Equity-Income Portfolio (Initial Class) of the Fidelity Variable
Insurance Products Fund. The Portfolio seeks reasonable income.
FIDELITY VIP HIGH INCOME SUBACCOUNT: This subaccount invests in the
Fidelity VIP High Income Portfolio (Initial Class) of the Fidelity Variable
Insurance Products Fund. The Portfolio seeks a high level of current income
while also considering growth of capital.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT: This subaccount invests in the
Scudder VLIF Growth and Income Portfolio (Class A Shares) of the Scudder
Variable Life Investment Fund. The Portfolio seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
SCUDDER VLIF INTERNATIONAL SUBACCOUNT: This subaccount invests in the
Scudder VLIF International Portfolio (Class A Shares) of the Scudder Variable
Life Investment Fund. The Portfolio seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
KEMPER VARIABLE SERIES
KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests in the
Kemper Government Securities Portfolio of the Kemper Variable Series. The
Portfolio seeks high current return consistent with preservation of capital.
KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests in the Kemper Money
Market Portfolio of the Kemper Variable Series. The Portfolio seeks maximum
current income to the extent consistent with stability of principal from a
portfolio of high quality money market instruments. The Portfolio seeks to
maintain a net asset value of $1.00 per share but there can be no assurance that
the Portfolio will be able to do so.
43
<PAGE> 46
KILICO VARIABLE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount invests in the Kemper
Small Cap Growth Portfolio of the Kemper Variable Series. The Portfolio seeks
maximum appreciation of investors' capital.
KEMPER TOTAL RETURN SUBACCOUNT: This subaccount invests in the Kemper Total
Return Portfolio of the Kemper Variable Series. The Portfolio seeks a high total
return, a combination of income and capital appreciation, consistent with
reasonable risk.
(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 $101,356, $2,874,754 and $32,068 for the Kemper Select, Power V
and Farmers Variable Universal Life I policies, respectively, for the year ended
December 31, 1999. Additionally, KILICO assesses a daily charge to the
subaccounts for mortality and expense risk assumed by KILICO at an annual rate
of 0.90% of assets.
Proceeds payable on the surrender of a Policy are reduced by the amount of
any applicable contingent deferred sales charge.
A state and local premium tax charge of 2.5% is deducted from each premium
payment under the Power V and Farmers Variable Universal Life I policies prior
to allocation of the net premium. This charge is to reimburse KILICO for the
payment of state premium taxes. KILICO expects to pay an average state premium
tax rate of approximately 2.5% but the actual premium tax attributable to a
Policy may be more or less. Under Section 848 of the Internal Revenue Code (the
"Code"), the receipt of premium income by a life insurance company requires the
deferral of a portion of the acquisition cost over a maximum of a 120 month
period. The effect of Section 848 for KILICO is an acceleration of income
recognition over a deferral of the associated deductions for tax purposes; this
is referred to as deferred acquisition cost or, the "DAC tax". As compensation
for this accelerated liability, a DAC tax charge of 1.00% of each premium dollar
is deducted from the premium by KILICO under the Power V and Farmers Variable
Universal Life I policies before investment of a Policy Owner's funds into the
Separate Account. Under the Kemper Destinations Life policies, for the first ten
policy years, a tax charge equal to an annual rate of 0.40% of the average
monthly cash value is assessed against the Policy. The tax charge covers a
portion of KILICO's state premium tax expense and a certain Federal income tax
liability incurred as a result of the receipt of premium.
Policy loans are also provided for under the terms of the Policy. The
minimum amount of the loan under the Power V and Farmers Variable Universal Life
I policies is $500 and is limited to 90% of the surrender value, less applicable
surrender charges. The minimum amount of the loan under the Kemper Destinations
Life policies is $1,000 and is limited to 90% of the surrender value, less
applicable surrender charges. Interest is assessed against a policy loan under
the terms of the Policy. Policy loans are carried in KILICO's general account.
Scudder Kemper Investments, Inc., an affiliated company, is the investment
manager of the Kemper Variable Series and the Scudder Variable Life Investment
Fund. Investors Brokerage Services, Inc., a wholly-owned subsidiary of KILICO,
is the principal underwriter for the Separate Account.
Fidelity Management & Research Company is the investment manager of the
Fidelity Variable Insurance Products Fund and is not affiliated with KILICO.
(4) NET TRANSFERS (TO) FROM AFFILIATE OR SUBACCOUNTS
Net transfers (to) from affiliate or subaccounts include transfers of all
or part of the Policy Owner's interest to or from another eligible subaccount or
to the general account of KILICO.
(5) POLICY OWNERS' EQUITY
Policy Owners' equity as of December 31, 1999 does not include any amounts
attributable to Kemper Destinations Life because sales had not commenced prior
to December 31, 1999.
44
<PAGE> 47
Policy Owners' equity for the policies listed below, at December 31, 1999,
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>
KEMPER SELECT POLICIES
KEMPER VARIABLE SERIES:
Kemper Government Securities Subaccount..................... 2,002 $ 2.131 $4,267
Kemper Money Market Subaccount.............................. 820 1.771 1,454
Kemper Total Return Subaccount.............................. 1,012 3.231 3,270
------
TOTAL KEMPER SELECT POLICY OWNERS' EQUITY.............. $8,991
======
POWER V POLICIES
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
Fidelity VIP Equity-Income Subaccount....................... 5 $26.657 $ 126
Fidelity VIP High Income Subaccount......................... 1 12.299 14
SCUDDER VARIABLE LIFE INVESTMENT FUND:
Scudder VLIF Growth and Income Subaccount................... 5 11.818 56
Scudder VLIF International Subaccount....................... 4 22.057 91
KEMPER VARIABLE SERIES:
Kemper Government Securities Subaccount..................... 26 1.377 36
Kemper Money Market Subaccount.............................. 418 1.141 477
Kemper Small Cap Growth Subaccount.......................... 623 3.481 2,169
Kemper Total Return Subaccount.............................. 45 4.337 195
------
TOTAL POWER V POLICY OWNERS' EQUITY.................... $3,164
======
FARMERS VARIABLE UNIVERSAL LIFE I POLICIES
SCUDDER VARIABLE LIFE INVESTMENT FUND:
Scudder VLIF Growth and Income Subaccount................... 1 $11.746 $ 13
Scudder VLIF International Subaccount....................... 0 22.335 2
KEMPER VARIABLE SERIES:
Kemper Government Securities Subaccount..................... 1 1.208 1
Kemper Small Cap Growth Subaccount.......................... 1 2.635 2
------
TOTAL FARMERS VARIABLE UNIVERSAL LIFE I POLICY OWNERS'
EQUITY................................................ $ 18
======
</TABLE>
(6) SUBSEQUENT EVENT
As of February 1, 2000, Zurich Kemper LifeINVESTOR flexible premium
variable universal life policies ("Zurich Kemper LifeINVESTOR") was made
available in the Separate Account. Zurich Kemper LifeINVESTOR policies have
thirty-one subaccounts which are available to Policy Owners and each subaccount
invests exclusively in the shares of a corresponding portfolio of The Alger
American Fund, The Dreyfus Socially Responsible Growth Fund, Inc., the Dreyfus
Life & Annuity Index Fund d/b/a Dreyfus Stock Index Fund, the Dreyfus Variable
Investment Fund, the Templeton Variable Products Series Fund (Class 2 Shares),
the Fidelity Variable Insurance Products Fund (Initial Class), the Janus Aspen
Series, the Scudder Variable Life Investment Fund (Class A Shares), and the
Kemper Variable Series, all of which are open-end diversified management
investment companies.
45
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, comprehensive income,
stockholder's equity and cash flows present fairly, in all material respects,
the financial position of Kemper Investors Life Insurance Company and
subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedules listed in the accompanying index present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 17, 2000
46
<PAGE> 49
(This page intentionally left blank)
47
<PAGE> 50
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1999, $3,397,188, December
31, 1998, $3,421,535)..................................... $ 3,276,017 $ 3,482,820
Trading account securities at fair value (amortized cost:
December 31, 1998, $99,095)............................... -- 101,781
Equity securities (cost: December 31, 1999, $65,235;
December 31, 1998, $66,776)............................... 61,592 66,854
Short-term investments...................................... 42,391 58,334
Joint venture mortgage loans................................ 67,242 65,806
Third-party mortgage loans.................................. 63,875 76,520
Other real estate-related investments....................... 20,506 22,049
Policy loans................................................ 261,788 271,540
Other invested assets....................................... 25,621 23,645
----------- -----------
Total investments................................. 3,819,032 4,169,349
Cash........................................................ 12,015 13,486
Accrued investment income................................... 127,219 124,213
Goodwill.................................................... 203,907 216,651
Value of business acquired.................................. 119,160 118,850
Deferred insurance acquisition costs........................ 159,667 91,543
Deferred income taxes....................................... 93,502 35,059
Reinsurance recoverable..................................... 309,696 344,837
Receivable on sales of securities........................... 3,500 3,500
Other assets and receivables................................ 29,950 23,029
Assets held in separate accounts............................ 9,778,068 7,099,204
----------- -----------
Total assets...................................... $14,655,716 $12,239,721
=========== ===========
LIABILITIES
Future policy benefits...................................... $ 3,718,833 $ 3,906,391
Other policyholder benefits and funds payable............... 457,328 318,369
Other accounts payable and liabilities...................... 71,482 61,898
Liabilities related to separate accounts.................... 9,778,068 7,099,204
----------- -----------
Total liabilities................................. 14,025,711 11,385,862
----------- -----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value, authorized 300,000 shares;
outstanding 250,000 shares................................ 2,500 2,500
Additional paid-in capital.................................. 804,347 804,347
Accumulated other comprehensive income (loss)............... (120,819) 32,975
Retained earnings (deficit)................................. (56,023) 14,037
----------- -----------
Total stockholder's equity........................ 630,005 853,859
----------- -----------
Total liabilities and stockholder's equity........ $14,655,716 $12,239,721
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 51
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $264,640 $273,512 $296,195
Realized investment gains (losses).......................... (9,549) 51,868 10,546
Premium income.............................................. 21,990 22,346 22,239
Separate account fees and charges........................... 74,715 61,982 85,413
Other income................................................ 11,623 10,031 11,087
-------- -------- --------
Total revenue..................................... 363,419 419,739 425,480
-------- -------- --------
BENEFIT AND EXPENSES
Interest credited to policyholders.......................... 162,243 176,906 199,782
Claims incurred and other policyholder benefits............. 18,185 28,029 28,372
Taxes, licenses and fees.................................... 30,234 30,292 52,608
Commissions................................................. 67,555 39,046 32,602
Operating expenses.......................................... 45,989 44,575 36,837
Deferral of insurance acquisition costs..................... (69,814) (46,565) (38,177)
Amortization of insurance acquisition costs................. 5,524 12,082 3,204
Amortization of value of business acquired.................. 12,955 17,677 24,948
Amortization of goodwill.................................... 12,744 12,744 15,295
-------- -------- --------
Total benefits and expenses....................... 285,615 314,786 355,471
-------- -------- --------
Income before income tax expense............................ 77,804 104,953 70,009
Income tax expense.......................................... 32,864 39,804 31,292
-------- -------- --------
Net income........................................ $ 44,940 $ 65,149 $ 38,717
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 52
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
NET INCOME.................................................. $ 44,940 $ 65,149 $ 38,717
--------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments arising
during period:
Unrealized holding gains (losses) on investments.......... (180,267) 25,372 60,802
Adjustment to value of business acquired.................. 12,811 (9,332) (28,562)
Adjustment to deferred insurance acquisition costs........ 5,726 (2,862) (2,680)
--------- -------- --------
Total unrealized holding gains (losses) on
investments arising during period............... (161,730) 13,178 29,560
--------- -------- --------
Less reclassification adjustments for items included in
net income:
Adjustment for (gains) losses included in realized
investment gains (losses)............................ 16,651 6,794 (9,016)
Adjustment for amortization of premium on fixed
maturities included in net investment income......... (10,533) (17,064) (17,866)
Adjustment for (gains) losses included in amortization
of value of business acquired........................ (454) (7,378) (2,353)
Adjustment for (gains) losses included in amortization
of insurance acquisition costs....................... 1,892 (463) (355)
--------- -------- --------
Total reclassification adjustments for items
included in net income.......................... 7,556 (18,111) (29,590)
--------- -------- --------
Other comprehensive income (loss), before related income tax
expense (benefit)......................................... (169,286) 31,289 59,150
Related income tax expense (benefit)........................ (15,492) 10,952 (985)
--------- -------- --------
Other comprehensive income (loss), net of tax..... (153,794) 20,337 60,135
--------- -------- --------
Comprehensive income (loss)....................... $(108,854) $ 85,486 $ 98,852
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE> 53
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 $ 2,500
--------- -------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of period............. 804,347 806,538 761,538
Capital contributions from parent........................... -- 4,261 45,000
Adjustment to prior period capital contribution from
parent.................................................... -- (6,452) --
--------- -------- --------
End of period..................................... 804,347 804,347 806,538
--------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of
period.................................................... 32,975 12,637 (47,498)
Other comprehensive income (loss), net of tax............... (153,794) 20,338 60,135
--------- -------- --------
End of period..................................... (120,819) 32,975 12,637
--------- -------- --------
RETAINED EARNINGS, beginning of period...................... 14,037 43,888 34,421
Net income.................................................. 44,940 65,149 38,717
Dividends to parent......................................... (115,000) (95,000) (29,250)
--------- -------- --------
End of period..................................... (56,023) 14,037 43,888
--------- -------- --------
Total stockholder's equity........................ $ 630,005 $853,859 $865,563
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE> 54
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 44,940 $ 65,149 $ 38,717
Reconcilement of net income to net cash provided:
Realized investment (gains) losses..................... 9,549 (51,868) (10,546)
Net change in trading account securities............... (51,239) (6,727) --
Interest credited and other charges.................... 158,557 173,958 198,206
Deferred insurance acquisition costs, net.............. (64,290) (34,483) (34,973)
Amortization of value of business acquired............. 12,955 17,677 24,948
Amortization of goodwill............................... 12,744 12,744 15,295
Amortization of discount and premium on investments.... 11,157 17,353 17,866
Deferred income taxes.................................. (42,952) (12,469) (99,370)
Net change in current federal income taxes............. (10,594) (73,162) 97,386
Benefits and premium taxes due related to separate
account bank-owned life insurance.................... 149,477 123,884 180,546
Other, net (11,901) (41,477) 17,168
----------- ----------- ---------
Net cash provided from operating activities....... 218,403 190,579 445,243
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity...................... 335,735 491,699 229,208
Fixed maturities sold prior to maturity................ 1,269,290 882,596 633,872
Equity securities...................................... 11,379 107,598 --
Mortgage loans, policy loans and other invested
assets............................................... 75,389 180,316 131,866
Cost of investments purchased or loans originated:
Fixed maturities....................................... (1,455,496) (1,319,119) (606,028)
Equity securities...................................... (8,703) (83,303) --
Mortgage loans, policy loans and other invested
assets............................................... (43,665) (66,331) (76,350)
Short-term investments, net............................... 15,943 177,723 (164,361)
Net change in receivable and payable for securities
transactions........................................... -- (677) 29,746
Net change in other assets................................ (2,725) -- 244
----------- ----------- ---------
Net cash provided from investing activities....... 197,147 370,502 178,197
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................... 383,874 180,124 145,687
Withdrawals............................................ (694,848) (649,400) (745,510)
Capital contributions from parent......................... -- 4,261 45,000
Dividends to parent....................................... (115,000) (95,000) (29,250)
Other..................................................... 8,953 (11,448) (18,275)
----------- ----------- ---------
Net cash used in financing activities............. (417,021) (571,463) (602,348)
----------- ----------- ---------
Net increase (decrease) in cash.............. (1,471) (10,382) 21,092
CASH, beginning of period................................... 13,486 23,868 2,776
----------- ----------- ---------
CASH, end of period......................................... $ 12,015 $ 13,486 $ 23,868
=========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE> 55
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"). Kemper and the Company are wholly-owned subsidiaries of
Zurich Financial Services ("ZFS" or "Zurich"). ZFS is owned by Zurich Allied AG
and Allied Zurich p.l.c., fifty-seven percent and forty-three percent,
respectively. Zurich Allied AG is listed on the Swiss Market Index. Allied
Zurich p.l.c. is included in the FTSE-100 Share Index in London.
The financial statements include the accounts of the Company on a
consolidated basis. All significant intercompany balances and transactions have
been eliminated. Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements in order for them to conform to the 1999
presentation. The accompanying consolidated financial statements of the Company
as of and for the years ended December 31, 1999, 1998 and 1997, have been
prepared in conformity with accounting principles generally accepted in the
United States.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 goodwill, deferred insurance acquisition costs, the value of
business acquired, provisions for real estate-related losses and reserves,
other-than-temporary declines in values for fixed maturities, the valuation
allowance for deferred income taxes and the calculation of fair value
disclosures for certain financial instruments.
GOODWILL
The Company reviews goodwill to determine if events or changes in
circumstances may have affected the recoverability of the outstanding goodwill
as of each reporting period. In the event that the Company determines that
goodwill is not recoverable, it would amortize such amounts as additional
goodwill expense in the accompanying financial statements. As of December 31,
1999, the Company believes that no such adjustment is necessary.
In December of 1997, the Company changed its amortization period from
twenty-five years 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.
VALUE OF BUSINESS ACQUIRED
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
The value of the business acquired is amortized over the estimated contract
life of the business acquired in relation to the present value of estimated
gross profits using current assumptions based on an interest rate equal to
53
<PAGE> 56
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2004 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>
1997 (actual).......................................... 168,692 (34,906) 9,958 143,744
1998 (actual).......................................... 143,744 (26,807) 9,129 126,066
1999 (actual).......................................... 126,066 (20,891) 7,936 113,111
2000................................................... 113,111 (23,418) 6,971 96,664
2001................................................... 96,664 (21,493) 5,890 81,061
2002................................................... 81,061 (17,805) 4,970 68,226
2003................................................... 68,226 (16,160) 4,185 56,251
2004................................................... 56,251 (14,625) 3,438 45,064
</TABLE>
The projected ending balance of the value of business acquired will be
further adjusted to reflect the impact of unrealized gains or losses on fixed
maturities held as available for sale in the investment portfolio. Such
adjustments are not recorded in the Company's net income but rather are recorded
as a credit or charge to accumulated other comprehensive income, net of income
tax. This adjustment increased the value of business acquired by $6.0 million as
of December 31, 1999 and decreased the value of business acquired by $7.2
million as of December 31, 1998. Accumulated other comprehensive income
increased by approximately $3.9 million as of December 31, 1999 due to this
adjustment and decreased accumulated other comprehensive income by $4.7 million
as of December 31, 1998.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs.
Premiums for term life policies are reported as earned when due. Profits
for such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
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.
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business, principally commission expense and
certain policy issuance and underwriting expenses, have been deferred to the
extent they are recoverable from estimated future gross profits on the related
contracts and policies. The deferred insurance acquisition costs for annuities,
separate account business and interest-sensitive life insurance products are
being amortized over the estimated contract life in relation to the present
value of estimated gross profits. Deferred insurance acquisition costs related
to such interest-sensitive products also reflect the estimated impact of
unrealized gains or losses on fixed maturities held as available for sale in the
investment portfolio, through a credit or charge to accumulated other
comprehensive income, net of income tax. The deferred insurance acquisition
costs for term-life insurance products are being amortized over the premium
paying period of the policies.
54
<PAGE> 57
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 10.0 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 2.5 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed
principally by a net level premium method. Anticipated rates of mortality are
based on the 1975-1980 Select and Ultimate Table modified by Company experience,
including withdrawals. Estimated future investment yields are a level 7.1
percent.
GUARANTY FUND ASSESSMENTS
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1999 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities and equity securities are carried at fair
value. Short-term investments are carried at cost, which approximates fair
value.
The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-backed and asset-backed securities, over the estimated life of the
security. Such amortization is included in net investment income. Amortization
of the discount or premium from mortgage-backed and asset-backed securities is
recognized using a level effective yield method which considers the estimated
timing and amount of prepayments of the underlying loans and is adjusted to
reflect differences which arise between the prepayments originally anticipated
and the actual prepayments received and currently anticipated. To the extent
that the estimated lives of such securities change as a result of changes in
prepayment rates, the adjustment is also included in net investment income. The
Company does not accrue interest income on fixed maturities deemed to be
impaired on an other-than-temporary basis, or on mortgage loans and other real
estate loans where the likelihood of collection of interest is doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized
discount and any applicable reserves or write-downs. Other real estate-related
investments, net of any applicable reserves and write-downs, include notes
receivable from real estate ventures and investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures. Real
estate reserves are established when declines in collateral values, estimated in
light of current economic conditions, indicate a likelihood of loss.
Investments in policy loans and other invested assets, consisting primarily
of venture capital investments and a leveraged lease, are carried primarily at
cost.
Realized gains or losses on sales of investments, determined on the basis
of identifiable cost on the disposition of the respective investment,
recognition of other-than-temporary declines in value and changes in real
estate-related reserves and write-downs are included in revenue. Net unrealized
gains or losses on revaluation of investments are credited or charged to
accumulated other comprehensive income (loss). 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
55
<PAGE> 58
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
separate account and retains varying amounts of withdrawal charges to cover
expenses in the event of early withdrawals by contract holders. The assets and
liabilities of the separate accounts are carried at fair value.
INCOME TAX
The Company files a separate Federal income tax return. Deferred taxes are
provided on the temporary differences between the tax and financial statement
basis of assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. The
Company paid federal income taxes of $83.8 million, $126.0 million and $29.0
million directly to the United States Treasury Department during 1999, 1998 and
1997, respectively.
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at
estimated fair value as fixed maturities are considered available for sale. The
carrying value of fixed maturities compared with amortized cost, adjusted for
other-than-temporary declines in value, were as follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
VALUE COST GAINS LOSSES
(in thousands) ---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
U.S. treasury securities and obligations of U.S.
government agencies and authorities................ $ 6,516 $ 6,631 $ -- $ (115)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.................. 21,656 22,107 -- (451)
Debt securities issued by foreign governments........ 23,890 24,749 380 (1,239)
Corporate securities................................. 2,063,054 2,147,606 2,750 (87,302)
Mortgage and asset-backed securities................. 1,160,901 1,196,095 450 (35,644)
---------- ---------- ------- ---------
Total fixed maturities........................ $3,276,017 $3,397,188 $ 3,580 $(124,751)
========== ========== ======= =========
DECEMBER 31, 1998
U.S. treasury securities and obligations of U.S.
government agencies and authorities................ $ 7,951 $ 7,879 $ 81 $ (9)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.................. 27,039 26,768 362 (91)
Debt securities issued by foreign governments........ 69,357 67,239 2,266 (148)
Corporate securities................................. 1,908,850 1,866,372 46,664 (4,186)
Mortgage and asset-backed securities................. 1,469,623 1,453,277 19,063 (2,717)
---------- ---------- ------- ---------
Total fixed maturities........................ $3,482,820 $3,421,535 $68,436 $ (7,151)
========== ========== ======= =========
</TABLE>
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1999, are shown below. Actual maturities
will differ from contractual maturities because borrowers may
56
<PAGE> 59
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
have the right to call or prepay obligations with or without call or prepayment
penalties and because mortgage-backed and asset-backed securities provide for
periodic payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST
(in thousands) ---------- ----------
<S> <C> <C>
One year or less............................................ $ 49,221 $ 48,953
Over one year through five years............................ 747,086 765,064
Over five years through ten years........................... 1,022,850 1,073,468
Over ten years.............................................. 295,959 313,608
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,160,901 1,196,095
---------- ----------
Total fixed maturities............................... $3,276,017 $3,397,188
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.9 years.
Proceeds from sales of investments in fixed maturities prior to maturity
were $1,269.3 million, $882.6 million and $633.9 million during 1999, 1998 and
1997, respectively. Gross gains of $7.9 million, $10.1 million and $3.1 million
and gross losses of $17.7 million, $8.0 million and $13.7 million were realized
on sales and write-downs of fixed maturities in 1999, 1998 and 1997,
respectively. Excluding agencies of the U.S. government, there were no
individual investments that exceeded ten percent of stockholder's equity at
December 31, 1999.
At December 31, 1999, securities carried at approximately $6.2 million were
on deposit with governmental agencies as required by law.
Upon default or indication of potential default by an issuer of fixed
maturity securities, the issue(s) of such issuer would be placed on nonaccrual
status and, since declines in fair value would no longer be considered by the
Company to be temporary, would be analyzed for possible write-down. Any such
issue would be written down to its net realizable value during the fiscal
quarter in which the impairment was determined to have become other than
temporary. Thereafter, each issue on nonaccrual status is regularly reviewed,
and additional write-downs may be taken in light of later developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $151.6 million real estate portfolio at December 31, 1999
consists of joint venture and third-party mortgage loans and other real
estate-related investments. At December 31, 1999 and 1998, total impaired real
estate-related loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross...................... $ 74.9 $ 83.9
Impaired loans with reserves--gross......................... 23.4 25.0
------ ------
Total gross impaired loans........................... 98.3 108.9
Reserves related to impaired loans.......................... (18.5) (18.5)
Write-downs related to impaired loans....................... (3.5) (3.5)
------ ------
Net impaired loans................................... $ 76.3 $ 86.9
====== ======
</TABLE>
Impaired loans without reserves include loans in which the deficit in
equity investments in real estate-related investments is considered in
determining reserves and write-downs. The Company had an average balance of
$100.0 million and $54.6 million in impaired loans for 1999 and 1998,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance.
57
<PAGE> 60
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
At December 31, 1999 and 1998, loans on nonaccrual status, before reserves
and write-downs, amounted to $98.3 million and $37.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
NET INVESTMENT INCOME
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $231,176 $232,707 $250,170
Dividends on equity securities.............................. 4,618 2,143 2,123
Income from short-term investments.......................... 3,568 5,391 4,128
Income from mortgage loans.................................. 6,296 14,964 16,283
Income from policy loans.................................... 20,131 21,096 20,549
Income from other real estate-related investments........... 155 352 6,631
Income from other loans and investments..................... 2,033 2,223 2,045
-------- -------- --------
Total investment income.............................. $267,977 $278,876 $301,929
Investment expense.......................................... (3,337) (5,364) (5,734)
-------- -------- --------
Net investment income................................ $264,640 $273,512 $296,195
======== ======== ========
</TABLE>
NET REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the years ended December 31, 1999,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
------------------------------
1999 1998 1997
(in thousands) ------- ------- --------
<S> <C> <C> <C>
Real estate-related......................................... $ 4,201 $41,362 $ 19,758
Fixed maturities............................................ (9,755) 2,158 (10,656)
Trading account securities--gross gains..................... 491 3,254 --
Trading account securities--gross losses.................... (7,794) (417) --
Trading account securities--holding losses.................. -- (151) --
Equity securities........................................... 1,039 5,496 914
Other....................................................... 2,269 166 530
------- ------- --------
Realized investment gains (losses) before income tax
expense (benefit)...................................... $(9,549) $51,868 $ 10,546
Income tax expense (benefit)................................ (3,342) 18,154 3,691
------- ------- --------
Net realized investment gains (losses).................... $(6,207) $33,714 $ 6,855
======= ======= ========
</TABLE>
Unrealized gains (losses) are computed below as follows: fixed
maturities--the difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity and other securities--the
58
<PAGE> 61
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
difference between fair value and cost. The change in net unrealized investment
gains (losses) by class of investment for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ------------ ------------ -----------
<S> <C> <C> <C>
Fixed maturities............................................ $(182,456) $36,717 $ 87,787
Equity and other securities................................. (3,929) (1,075) (103)
Adjustment to deferred insurance acquisition costs.......... 3,834 (2,399) (2,325)
Adjustment to value of business acquired.................... 13,265 (1,954) (26,209)
--------- ------- --------
Unrealized gain (loss) before income tax expense
(benefit).............................................. (169,286) 31,289 59,150
Income tax expense (benefit)................................ (15,492) 10,952 (985)
--------- ------- --------
Net unrealized gain (loss) on investments............ $(153,794) $20,337 $ 60,135
========= ======= ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1999 and 1998 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, 1999 and 1998, the Company's net equity investment in
unconsolidated investees amounted to $0.9 million and $1.2 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $155 thousand, $241 thousand and $835 thousand in 1999,
1998 and 1997, respectively.
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
Approximately 20.0 percent of the Company's investment-grade fixed
maturities at December 31, 1999 were mortgage-backed securities, down from 28.0
percent at December 31, 1998, due to sales and paydowns during 1999. 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 16.8 percent and 15.4 percent of the Company's
investment-grade fixed maturities at December 31, 1999 and 1998, respectively,
consisted of corporate asset-backed securities. The majority of the Company's
investments in asset-backed securities were backed by home equity loans (24.0%),
commercial mortgage-backed securities (22.8%), manufactured housing loans
(12.5%), other commercial assets (11.3%) and collateralized loan and bond
obligations (10.6%).
The Company's real estate portfolio is distributed by geographic location
and property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 1999 was as follows: California (36.8%), Hawaii
(13.6%), Washington (10.9%) and Colorado (10.1%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1999 was as
follows: hotels (36.3%), land (36.1%) and residential (13.5%).
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
59
<PAGE> 62
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
Company or third parties. In the present real estate markets, third-party
financing can require credit enhancing arrangements (e.g., standby financing
arrangements and loan commitments) from the Company. The values of development
projects are dependent on a number of factors, including Kemper's and the
Company's plans with respect thereto, obtaining necessary construction and
zoning permits and market demand for the permitted use of the property. There
can be no assurance that such permits will be obtained as planned or at all, nor
that such expenditures will occur as scheduled, nor that Kemper's and the
Company's plans with respect to such projects may not change substantially.
Slightly more than half of the Company's real estate mortgage loans are on
properties or projects where the Company, Kemper, or their affiliates have taken
ownership positions in joint ventures with a small number of partners.
At December 31, 1999, 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 $63.9 million, or
42.2 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties, one office building and one retail property.
At December 31, 1999, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
At December 31, 1999, 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 $55.4
million, or 36.5 percent, of the Company's real estate portfolio. Kemper's
interest in the MLP is 75.0 percent at December 31, 1999. Loans to the MLP were
placed on non-accrual status at the beginning of 1999 due to management's desire
not to increase book value of the MLP over net realizable value, as interest on
these loans has historically been added to principal. At December 31, 1999,
MLP-related commitments accounted for approximately $0.1 million of the
Company's off-balance-sheet legal commitments.
The remaining significant real estate-related investments amounted to $20.7
million at December 31, 1999 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, the Company has placed these real estate-related investments on
nonaccrual status as of December 31, 1996. The Company is currently pursuing the
zoning of all remaining unzoned properties, as well as pursuing steps to sell
all remaining zoned properties. However, due to the state of Hawaii's economy,
which has lagged behind the economic expansion of most of the rest of the United
States, the Company anticipates that it could be several additional years until
it completely disposes of all of its investments in Hawaii. At December 31,
1999, off-balance sheet legal commitments related to Hawaiian properties totaled
$4.0 million.
At December 31, 1999, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold. However, the Company continues to have Prime
Group-related commitments, which accounted for $25.7 million of the Company's
off-balance-sheet legal commitments at December 31, 1999.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Current..................................................... $ 75,816 $ 52,273 $130,662
Deferred.................................................... (42,952) (12,469) (99,370)
-------- -------- --------
Total............................................. $ 32,864 $ 39,804 $ 31,292
======== ======== ========
</TABLE>
60
<PAGE> 63
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
Additionally, the deferred income tax (benefit) expense related to items
included in other comprehensive income was as follows for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- ------- -------
<S> <C> <C> <C>
Unrealized gains and losses on investments.................. $(21,477) $12,476 $ 9,002
Value of business acquired.................................. 4,643 (684) (9,173)
Deferred insurance acquisition costs........................ 1,342 (840) (814)
-------- ------- -------
Total............................................. $(15,492) $10,952 $ (985)
======== ======= =======
</TABLE>
The actual income tax expense for 1999, 1998 and 1997 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 1999, 1998, and 1997 to income before income tax expense.
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) ------- ------- -------
<S> <C> <C> <C>
Computed expected tax expense............................... $27,232 $36,734 $24,503
Difference between "expected" and actual tax expense:
State taxes............................................... 1,608 (434) 1,801
Amortization of goodwill.................................. 4,460 4,460 5,353
Dividend received deduction............................... -- (540) --
Foreign tax credit........................................ (306) (250) (278)
Other, net................................................ (130) (166) (87)
------- ------- -------
Total actual tax expense.......................... $32,864 $39,804 $31,292
======= ======= =======
</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 unrealized losses on investments to
a realizable amount. This amount is based on the evidence available and
management's judgment. Any reversals of the valuation allowance are contingent
upon the recognition of future capital gains in the Company's federal income tax
return or a change in circumstances which causes the recognition of the benefits
to become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred federal tax asset or liability from
unrealized gains or losses on investments.
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred federal tax assets or liabilities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition costs ("DAC Tax").......... $121,723 $ 86,332 $ 75,522
Unrealized losses on investments.......................... 43,758 -- --
Life policy reserves...................................... 43,931 27,240 43,337
Unearned revenue.......................................... 59,349 42,598 37,243
Real estate-related....................................... 7,103 13,944 13,400
Other investment-related.................................. 928 5,770 3,298
Other..................................................... 3,133 4,923 4,371
-------- -------- --------
Total deferred federal tax assets...................... 279,925 180,807 177,171
Valuation allowance....................................... (58,959) (15,201) (15,201)
-------- -------- --------
Total deferred federal tax assets after valuation
allowance............................................ 220,966 165,606 161,970
-------- -------- --------
</TABLE>
61
<PAGE> 64
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax liabilities:
Value of business acquired................................ 55,884 41,598 48,469
Deferred insurance acquisition costs...................... 41,706 32,040 20,811
Depreciation and amortization............................. 19,957 19,111 20,201
Other investment-related.................................. 7,670 14,337 18,774
Unrealized gains on investments........................... -- 21,477 9,002
Other..................................................... 2,247 1,984 4,720
-------- -------- --------
Total deferred federal tax liabilities................. 127,464 130,547 121,977
-------- -------- --------
Net deferred federal tax assets............................. $ 93,502 $ 35,059 $ 39,993
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the
DAC Tax associated with $1.6 billion and $1.5 billion of new and renewal sales
in 1999 and 1998, respectively, from a non-registered individual and group
variable bank-owned life insurance contract ("BOLI"). Management believes that
it is more likely than not that the results of future operations will generate
sufficient taxable income over the ten year amortization period of the unearned
revenue and DAC Tax to realize such deferred tax assets.
The tax returns through the year 1993 have been examined by the Internal
Revenue Service ("IRS"). Changes proposed are not material to the Company's
financial position. The tax returns for the years 1994 through 1996 are
currently under examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received capital contributions from Kemper of $4.3 million and
$45.0 million during 1998 and 1997, respectively. The Company paid cash
dividends of $115.0 million, $95.0 million and $29.3 million to Kemper during
1999, 1998 and 1997, respectively.
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, 1999 and 1998, joint venture mortgage loans
totaled $67.2 million and $65.8 million, respectively, and during 1999, 1998 and
1997, the Company earned interest income on these joint venture loans of $0.6
million, $6.8 million and $7.5 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life
Assurance Company ("FKLA"), an affiliated company. The Company is allocated
expenses for the utilization of FKLA employees and facilities, the investment
management services of Scudder Kemper Investments, Inc. ("SKI") an affiliated
company, and the information systems of Kemper Service Company ("KSvC"), an SKI
subsidiary, based on the Company's share of administrative, legal, marketing,
investment management, information systems and operation and support services.
During 1999 and 1998, expenses allocated to the Company from SKI amounted to $17
thousand and $43 thousand, respectively. During 1997, expenses allocated to the
Company from SKI and KSvC amounted to $114 thousand. The Company also paid to
SKI investment management fees of $1.8 million, $3.1 million and $3.5 million
during 1999, 1998 and 1997, respectively. In addition, expenses allocated to the
Company from FKLA during 1999, 1998 and 1997 amounted to $34.1 million, $35.5
million and $30.0 million, respectively. The Company also paid to Kemper real
estate subsidiaries fees of $1.0 million, $1.5 million and $2.2 million in 1999,
1998 and 1997, respectively, related to the management of the Company's real
estate portfolio.
(8) REINSURANCE
As of December 31, 1999 and 1998, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $309.7 million
and $344.8 million, respectively.
In 1996, the Company assumed, on a yearly renewable term basis, term life
insurance from FKLA. Premiums assumed during 1999 under the terms of the treaty
amounted to $21.3 million and the face amount which remained outstanding at
December 31, 1999 amounted to $10.4 billion.
62
<PAGE> 65
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
Effective January 1, 1997, the Company ceded 90 percent of all new direct
life insurance premiums to outside reinsurers. Life reserves ceded to outside
reinsurers on the Company's direct business amounted to approximately $595
thousand and $413 thousand as of December 31, 1999 and 1998, respectively.
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, Zurich Insurance Company, Bermuda
Branch ("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this
agreement, the Company ceded, on a yearly renewable term basis, 90 percent of
the net amount at risk (death benefit payable to the insured less the insured's
separate account cash surrender value) related to BOLI, which is held in the
Company's separate accounts. As consideration for this reinsurance coverage, the
Company cedes separate account fees (cost of insurance charges) to ZICBB and
retains a portion of such funds under the terms of the reinsurance agreement in
a funds withheld account which is included as a component of benefits and funds
payable in the accompanying consolidated balance sheets. During 1998, the
Company modified the reinsurance agreement to increase the reinsurance from
ninety percent to one hundred percent.
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
BANK OWNED LIFE INSURANCE (BOLI)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Face amount in force........................................ $ 82,021 $ 66,186 $ 59,338
======== ======== ========
Net amount at risk ceded.................................... $(75,979) $(62,160) $(51,066)
======== ======== ========
Cost of insurance charges ceded............................. $ 166.4 $ 175.5 $ 24.3
======== ======== ========
Funds withheld account...................................... $ 263.4 $ 170.9 $ 23.4
======== ======== ========
</TABLE>
The Company has a funds withheld account ("FWA") supporting reserve credits
on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA was marked-to-market based predominantly
upon the total return of the Governmental Bond Division of the KILICO Variable
Series I Separate Account. During 1998, the Company recorded a $2.5 million
increase to the FWA related to this mark-to-market. In November 1998, to
properly match revenue and expenses, the Company had also placed assets
supporting the FWA in a segmented portion of its General Account. This portfolio
was classified as "trading" under Statement of Financial Accounting Standards
No. 115 ("FAS 115") at December 31, 1998 and through November 30, 1999. FAS 115
mandates that assets held in a trading account be valued at fair value, with
changes in fair value flowing through the income statement as realized capital
gains and losses. During 1998, the Company recorded a realized capital gain of
$2.8 million upon transfer of these assets from "available for sale" to the
trading portfolio as required by FAS 115. In addition, the Company recorded
realized capital losses of $7.3 million and $0.2 million related to the changes
in fair value of this portfolio during 1999 and 1998, respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, the Company no longer marked-to-market a portion of
the FWA liability and therefore no longer designated the related portion of
assets as "trading". As a result, changes in fair value to the FWA and the
assets supporting the FWA no longer flow through the Company's operating
results.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a health and welfare benefit plan that provides insurance
benefits covering substantially all eligible, active and retired employees of
FKLA and their covered dependents and beneficiaries. 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
63
<PAGE> 66
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
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 $1.2 million and $2.0 million at December 31, 1999 and 1998,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 8.0 percent and 7.0 percent for 1999 and 1998, respectively. The
assumed health care trend rate used was based on projected experience for 1999,
7.2 percent for 2000, gradually declining to 5.6 percent by the year 2004 and
gradually declining thereafter.
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 1999 and 1998 by $190 thousand and $312 thousand,
respectively.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company nor its joint venture projects have been
identified as a "potentially responsible party" under Federal environmental
guidelines, inherent in the ownership of, or lending to, real estate projects is
the possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1999, the Company had future legal loan commitments and
stand-by financing agreements totaling $29.8 million to support the financing
needs of various real estate investments. To the extent these arrangements are
called upon, amounts loaned would be collateralized by assets of the joint
ventures, including first mortgage liens on the real estate. The Company's
criteria in making these arrangements are the same as for its mortgage loans and
other real estate investments. These commitments are included in the Company's
analysis of real estate-related reserves and write-downs. The fair values of
loan commitments and standby financing agreements are estimated in conjunction
with and using the same methodology as the fair value estimates of mortgage
loans and other real estate-related investments.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. Fair value estimates for financial instruments not
carried at fair value are generally determined using discounted cash flow models
and assumptions that are based on judgments regarding current and future
economic conditions and the risk characteristics of the investments. Although
fair value estimates are calculated using assumptions that management believes
are appropriate, changes in assumptions could significantly affect the estimates
and such estimates should be used with care.
64
<PAGE> 67
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
FIXED MATURITIES AND EQUITY SECURITIES: Fair values were determined by
using market quotations, or independent pricing services that use prices
provided by market makers or estimates of fair values obtained from yield data
relating to instruments or securities with similar characteristics, or fair
value as determined in good faith by the Company's portfolio manager, SKI.
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values.
MORTGAGE LOANS AND OTHER REAL ESTATE-RELATED INVESTMENTS: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty in estimating the fair value of real estate due to the lack
of a liquid quotable market.
OTHER LOANS AND INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values. The
fair values of policy loans were estimated by discounting the expected future
cash flows using an interest rate charged on policy loans for similar policies
currently being issued.
LIFE POLICY BENEFITS: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1999 and 1998 to be 4.78 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 5.0 percent in
both 1999 and 1998.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities.............................. $3,276,017 $3,276,017 $3,482,820 $3,482,820
Trading account securities.................... -- -- 101,781 101,781
Cash and short-term investments............... 54,406 54,406 71,820 71,820
Mortgage loans and other real estate-related
assets..................................... 151,623 151,623 164,375 164,375
Policy loans.................................. 261,788 261,788 271,540 271,540
Equity securities............................. 61,592 61,592 66,854 66,854
Other invested assets......................... 25,620 26,226 23,645 27,620
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life
reserves................................... 3,399,299 3,299,254 3,551,050 3,657,510
Funds withheld account........................ 263,428 263,428 170,920 170,920
</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 2000 is $59.1 million. The
Company paid
65
<PAGE> 68
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS (CONTINUED)
cash dividends of $115.0 million, $95.0 million and $29.3 million to Kemper
during 1999, 1998 and 1997, respectively.
The Company's net income and capital and surplus as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 59,116 $ 64,871 $ 58,372
======== ======== ========
Statutory capital and surplus............................... $394,966 $455,213 $476,924
======== ======== ========
</TABLE>
In March 1998, the National Association of Insurance Commissioners approved
the codification of statutory accounting principles. Codification is effective
January 1, 2001. The Company has not quantified the impact that codification
will have on its statutory financial position or results of operations.
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
QUARTER ENDED -------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1999 OPERATING SUMMARY
Revenues.................................. $95,646 $ 86,164 $78,301 $103,308 $363,419
======= ======== ======= ======== ========
Net operating income, excluding realized
gains (losses)......................... $11,222 $ 14,385 $11,568 $ 13,971 $ 51,147
Net realized investment gains (losses).... (627) (1,286) (5,098) 805 (6,207)
------- -------- ------- -------- --------
Net income........................ $10,595 $ 13,099 $ 6,470 $ 14,776 $ 44,940
======= ======== ======= ======== ========
1998 OPERATING SUMMARY
Revenues.................................. $98,026 $110,003 $98,752 $112,958 $419,739
======= ======== ======= ======== ========
Net operating income, excluding realized
gains.................................. $ 8,025 $ 5,700 $ 7,169 $ 10,541 $ 31,435
Net realized investment gains............. 1,205 10,187 5,818 16,504 33,714
------- -------- ------- -------- --------
Net income........................ $ 9,230 $ 15,887 $12,987 $ 27,045 $ 65,149
======= ======== ======= ======== ========
1997 OPERATING SUMMARY
Revenues.................................. $89,055 $ 99,293 $86,071 $151,061 $425,480
======= ======== ======= ======== ========
Net operating income, excluding realized
gains (losses)......................... $ 9,590 $ 7,701 $ 6,075 $ 8,496 $ 31,862
Net realized investment gains (losses).... 578 5,305 (1,971) 2,943 6,855
------- -------- ------- -------- --------
Net income........................ $10,168 $ 13,006 $ 4,104 $ 11,439 $ 38,717
======= ======== ======= ======== ========
</TABLE>
(15) OPERATING SEGMENTS AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 131 established
standards for how to report information about operating segments. It also
established standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted FAS 131 as of December
31, 1998 and the impact of implementation did not affect the Company's
consolidated financial position, results of operations or cash flows. In the
initial year of adoption, FAS 131 requires comparative information for earlier
years to be restated, unless impracticable to do so.
The Company, FKLA, Zurich Life Insurance Company of America, ("ZLICA"), and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, operate under the trade name Zurich Kemper Life. For purposes of
this operating segment disclosure, Zurich Kemper Life will also include the
66
<PAGE> 69
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
operations of Zurich Direct, Inc., an affiliated direct marketing life insurance
agency and excludes FLA, as it is owned by its policyholders.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The
SBU concept employed by ZFS has each SBU concentrate on a specific customer
market. The SBU is the focal point of Zurich Kemper Life, because it is at the
SBU level that Zurich Kemper Life can clearly identify customer segments and
then work to understand and satisfy the needs of each customer. The
contributions of Zurich Kemper Life's SBUs to consolidated revenues, operating
results and certain balance sheet data pertaining thereto, are shown in the
following tables on the basis of accounting principles generally accepted in the
United States.
Zurich Kemper Life is segregated into the Life Brokerage, Financial,
Retirement Solutions Group ("RSG") and Direct SBUs. The SBUs are not managed at
the legal entity level, but rather at the Zurich Kemper Life level. Zurich
Kemper Life's SBUs cross legal entity lines, as certain similar products are
sold by more than one legal entity. The vast majority of the Company's business
is derived from the Financial and RSG SBUs.
Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 1999, 1998 and 1997, Zurich Kemper Life did not derive net revenue
from one customer that exceeded 10 percent of the total revenue of Zurich Kemper
Life.
The principal products and markets of Zurich Kemper Life's SBUs are as
follows:
LIFE BROKERAGE: The Life Brokerage SBU develops low cost term and universal
life insurance, as well as fixed annuities, to market through independent
agencies and national marketing organizations.
FINANCIAL: The Financial SBU focuses on a wide range of products that
provide for the accumulation, distribution and transfer of wealth and primarily
includes variable and fixed annuities, variable universal life and bank-owned
life insurance. These products are distributed to consumers through financial
intermediaries such as banks, brokerage firms and independent financial
planners. Institutional business includes BOLI and funding agreements (included
in FKLA).
RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets
variable annuities to K-12 schoolteachers, administrators, and healthcare
workers, along with college professors and certain employees of selected
non-profit organizations. This target market is eligible for what the IRS
designates as retirement-oriented savings or investment plans that qualify for
special tax treatment.
DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
67
<PAGE> 70
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
Summarized financial information for ZKL's SBU's are as follows:
As of and for the period ending December 31, 1999:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income..................... $ 145,533 $ 410 $ -- $ 8,038 $ 153,981
Net investment income.............. 137,106 175,590 101,202 1,297 415,195
Realized investment gains
(losses)........................ 976 (6,980) (98) -- (6,102)
Fees and other income.............. 70,477 48,873 35,742 44,528 199,620
---------- ----------- ---------- -------- -----------
Total revenue.............. 354,092 217,893 136,846 53,863 762,694
---------- ----------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits.............. 200,161 112,869 68,801 3,529 385,360
Intangible asset amortization...... 54,957 12,053 13,989 -- 80,999
Net deferral of insurance
acquisition costs............... (37,433) (43,664) (20,624) (41,412) (143,133)
Commissions and taxes, licenses and
fees............................ 21,881 66,702 26,700 17,411 132,694
Operating expenses................. 56,179 25,101 23,611 71,194 176,085
---------- ----------- ---------- -------- -----------
Total benefits and
expenses................. 295,745 173,061 112,477 50,722 632,005
---------- ----------- ---------- -------- -----------
Income before income tax expense..... 58,347 44,832 24,369 3,141 130,689
Income tax expense................... 25,707 19,235 10,966 1,114 57,022
---------- ----------- ---------- -------- -----------
Net income................. $ 32,640 $ 25,597 $ 13,403 $ 2,027 $ 73,667
========== =========== ========== ======== ===========
BALANCE SHEET
Total assets....................... $3,066,956 $10,311,850 $4,755,437 $144,189 $18,278,432
========== =========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -------------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $762,694 $73,667 $18,278,432
-------- ------- -----------
Less:
Revenue, net income and assets of FKLA.................... 305,334 24,801 3,162,048
Revenue, net income and assets of ZLICA................... 49,460 8,528 456,283
Revenue, net loss and assets of Zurich Direct............. 44,481 (4,602) 4,385
-------- ------- -----------
Totals per the Company's consolidated financial
statements............................................. $363,419 $44,940 $14,655,716
======== ======= ===========
</TABLE>
68
<PAGE> 71
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1998:
<TABLE>
<CAPTION>
(in thousands) LIFE
INCOME STATEMENT BROKERAGE FINANCIAL RSG DIRECT TOTAL
- ---------------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income...................... $ 160,067 $ 56 $ -- $ 5,583 $ 165,706
Net investment income............... 141,171 180,721 100,695 271 422,858
Realized investment gains........... 20,335 33,691 15,659 30 69,715
Fees and other income............... 80,831 40,421 31,074 23,581 175,907
---------- ---------- ---------- -------- -----------
Total revenue.................. 402,404 254,889 147,428 29,465 834,186
---------- ---------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits............... 243,793 117,742 73,844 2,110 437,489
Intangible asset amortization....... 58,390 15,669 15,703 -- 89,762
Net deferral of insurance
acquisition costs................ (55,569) (9,444) (22,964) (22,765) (110,742)
Commissions and taxes, licenses and
fees............................. 29,539 43,919 22,227 11,707 107,392
Operating expenses.................. 61,659 24,924 20,279 35,593 142,455
---------- ---------- ---------- -------- -----------
Total benefits and expenses.... 337,812 192,810 109,089 26,645 666,356
---------- ---------- ---------- -------- -----------
Income before income tax expense...... 64,592 62,079 38,339 2,820 167,830
Income tax expense.................... 26,774 24,340 14,794 1,001 66,909
---------- ---------- ---------- -------- -----------
Net income..................... $ 37,818 $ 37,739 $ 23,545 $ 1,819 $ 100,921
========== ========== ========== ======== ===========
BALANCE SHEET
Total assets........................ $3,194,530 $8,232,927 $4,172,828 $ 46,254 $15,646,539
========== ========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- -------- -----------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $834,186 $100,921 $15,646,539
-------- -------- -----------
Less:
Revenue, net income and assets of FKLA.................... 336,841 35,953 2,986,381
Revenue, net loss and assets of ZLICA..................... 54,058 (1,066) 416,115
Revenue, net income and assets of Zurich Direct........... 23,548 885 4,322
-------- -------- -----------
Totals per the Company's consolidated financial
statements........................................ $419,739 $ 65,149 $12,239,721
======== ======== ===========
</TABLE>
69
<PAGE> 72
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS) LIFE
INCOME STATEMENT BROKERAGE FINANCIAL RSG DIRECT TOTAL
- --------------------------------------- ---------- ---------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income....................... $ 167,439 $ -- $ -- $ 4,249 $ 171,688
Net investment income................ 155,885 212,767 91,664 455 460,771
Realized investment gains............ 2,503 7,744 2,692 50 12,989
Fees and other income................ 78,668 73,823 23,663 8,007 184,161
---------- ---------- ---------- ------- -----------
Total revenue................... 404,495 294,334 118,019 12,761 829,609
---------- ---------- ---------- ------- -----------
BENEFITS AND EXPENSES
Policyholder benefits................ 247,878 153,327 60,061 2,234 463,500
Intangible asset amortization........ 58,534 25,593 15,589 -- 99,716
Net deferral of insurance acquisition
costs............................. (50,328) (18,222) (13,033) (5,242) (86,825)
Commissions and taxes, licenses and
fees.............................. 39,477 66,552 16,668 3,518 126,215
Operating expenses................... 55,859 20,282 14,320 19,472 109,933
---------- ---------- ---------- ------- -----------
Total benefits and expenses..... 351,420 247,532 93,605 19,982 712,539
---------- ---------- ---------- ------- -----------
Income (loss) before income tax expense
(benefit)............................ 53,075 46,802 24,414 (7,221) 117,070
Income tax expense (benefit)........... 25,554 21,144 10,545 (2,528) 54,715
---------- ---------- ---------- ------- -----------
Net income (loss)............... $ 27,521 $ 25,658 $ 13,869 $(4,693) $ 62,355
========== ========== ========== ======= ===========
BALANCE SHEET
Total assets......................... $2,877,854 $7,416,791 $3,759,173 $41,669 $14,095,487
========== ========== ========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -----------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $829,609 $62,355 $14,095,487
Less:
Revenue, net income and assets of FKLA.................... 338,854 24,740 3,105,396
Revenue, net income and assets of ZLICA................... 57,233 2,193 398,786
Revenue, net loss and assets of Zurich Direct............. 8,042 (3,295) 1,655
-------- ------- -----------
Totals per the Company's consolidated financial
statements........................................ $425,480 $38,717 $10,589,650
======== ======= ===========
</TABLE>
(16) SUBSEQUENT EVENT
In February 2000, the Company announced that it had entered into an
agreement to purchase for $5.5 million the following related entities, all
privately held New York corporations:
- PMG Securities Corporation
- PMG Asset Management, Inc.
- PMG Life Agency, Inc., and
- PMG Marketing, Inc.
These companies were primarily purchased for their specialization in the
target market of the RSG SBU. The acquisition is expected to close at the end of
the first quarter 2000.
70
<PAGE> 73
APPENDIX A
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 & thereafter 100
</TABLE>
* ATTAINED AGE AS OF THE BEGINNING OF THE POLICY YEAR
71
<PAGE> 74
APPENDIX B
POLICY FORM L-8521 KEMPER INVESTORS LIFE INSURANCE COMPANY
SURRENDER TARGET PREMIUMS
<TABLE>
<CAPTION>
PREFERRED NONTOBACCO STANDARD NONTOBACCO PREFERRED TOBACCO STANDARD TOBACCO
ISSUE -------------------- -------------------- ------------------ ----------------
AGE MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
- ----- -------- --------- -------- --------- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 NA NA 7.60 6.30 NA NA NA NA
2 NA NA 7.60 6.30 NA NA NA NA
3 NA NA 7.60 6.30 NA NA NA NA
4 NA NA 7.60 6.30 NA NA NA NA
5 NA NA 7.60 6.30 NA NA NA NA
6 NA NA 7.60 6.30 NA NA NA NA
7 NA NA 7.60 6.30 NA NA NA NA
8 NA NA 7.60 6.30 NA NA NA NA
9 NA NA 7.60 6.30 NA NA NA NA
10 NA NA 7.60 6.30 NA NA NA NA
11 NA NA 7.60 6.30 NA NA NA NA
12 NA NA 7.60 6.30 NA NA NA NA
13 NA NA 7.60 6.30 NA NA NA NA
14 NA NA 7.60 6.30 NA NA NA NA
15 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23
16 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23
17 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23
18 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23
19 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23
20 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23
21 7.81 6.48 7.81 6.48 10.52 8.52 10.52 8.52
22 8.03 6.67 8.03 6.67 10.84 8.81 10.84 8.81
23 8.24 6.85 8.24 6.85 11.17 9.10 11.17 9.10
24 8.46 7.04 8.46 7.04 11.49 9.39 11.49 9.39
25 8.67 7.22 8.67 7.22 11.82 9.68 11.82 9.68
26 8.98 7.47 8.98 7.47 12.28 10.06 12.28 10.06
27 9.29 7.72 9.29 7.72 12.74 10.44 12.74 10.44
28 9.60 7.97 9.60 7.97 13.21 10.83 13.21 10.83
29 9.91 8.22 9.91 8.22 13.67 11.21 13.67 11.21
30 10.22 8.47 10.22 8.47 14.13 11.59 14.13 11.59
31 10.65 8.78 10.65 8.78 14.76 12.08 14.76 12.08
32 11.08 9.10 11.08 9.10 15.39 12.57 15.39 12.57
33 11.50 9.41 11.50 9.41 16.01 13.05 16.01 13.05
34 11.93 9.73 11.93 9.73 16.64 13.54 16.64 13.54
35 12.36 10.04 12.36 10.04 17.27 14.03 17.27 14.03
36 12.94 10.59 12.94 10.59 18.14 14.66 18.14 14.66
37 13.52 11.13 13.52 11.13 19.01 15.29 19.01 15.29
38 14.11 11.68 14.11 11.68 19.87 15.93 19.87 15.93
39 14.69 12.22 14.69 12.22 20.74 16.56 20.74 16.56
40 15.27 12.77 15.27 12.77 21.61 17.19 21.61 17.19
41 16.28 13.59 16.28 13.59 22.76 18.01 22.76 18.01
42 17.29 14.40 17.29 14.40 23.91 18.83 23.91 18.83
43 18.31 15.22 18.31 15.22 25.05 19.66 25.05 19.66
44 19.32 16.03 19.32 16.03 26.20 20.48 26.20 20.48
45 20.33 16.85 20.33 16.85 27.35 21.30 27.35 21.30
46 21.53 17.57 21.53 17.57 28.94 22.43 28.94 22.43
47 22.73 18.28 22.73 18.28 30.54 23.56 30.54 23.56
48 23.92 19.00 23.92 19.00 32.13 24.70 32.13 24.70
49 25.12 19.71 25.12 19.71 33.73 25.83 33.73 25.83
50 26.32 20.43 26.32 20.43 35.32 26.96 35.32 26.96
51 27.88 21.24 27.88 21.24 37.33 28.38 37.33 28.38
52 29.44 22.06 29.44 22.06 39.34 29.80 39.34 29.80
53 31.00 22.87 31.00 22.87 41.36 31.23 41.36 31.23
54 32.56 23.69 32.56 23.69 43.37 32.65 43.37 32.65
55 34.12 24.50 34.12 24.50 45.38 34.07 45.38 34.07
56 34.67 25.41 34.67 25.41 46.50 34.71 46.50 34.71
57 35.21 26.32 35.21 26.32 47.62 35.34 47.62 35.34
</TABLE>
72
<PAGE> 75
<TABLE>
<CAPTION>
PREFERRED NONTOBACCO STANDARD NONTOBACCO PREFERRED TOBACCO STANDARD TOBACCO
ISSUE -------------------- -------------------- ------------------ ----------------
AGE MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
- ----- -------- --------- -------- --------- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
58 35.76 27.24 35.76 27.24 48.73 35.98 48.73 35.98
59 36.30 28.15 36.30 28.15 49.85 36.61 49.85 36.61
60 36.85 29.06 36.85 29.06 50.97 37.25 50.97 37.25
61 38.65 30.50 38.65 30.50 50.76 38.80 50.76 38.80
62 40.45 31.93 40.45 31.93 50.56 40.35 50.56 40.35
63 42.25 33.37 42.25 33.37 50.35 41.90 50.35 41.90
64 44.05 34.80 44.05 34.80 50.15 43.45 50.15 43.45
65 45.85 36.24 45.85 36.24 49.94 45.00 49.94 45.00
66 46.34 38.72 46.34 38.72 49.72 45.75 49.72 45.75
67 46.84 41.19 46.84 41.19 49.49 46.50 49.49 46.50
68 47.33 43.67 47.33 43.67 49.27 47.24 49.27 47.24
69 47.83 46.14 47.83 46.14 49.04 47.99 49.04 47.99
70 48.32 48.62 48.32 48.62 48.82 48.74 48.82 48.74
71 47.87 47.86 47.87 47.86 48.65 48.11 48.65 48.11
72 47.41 47.11 47.41 47.11 48.49 47.48 48.49 47.48
73 46.96 46.35 46.96 46.35 48.32 46.85 48.32 46.85
74 46.50 45.60 46.50 45.60 48.16 46.22 48.16 46.22
75 47.26 46.78 47.26 46.78 48.55 47.28 48.55 47.28
76 47.02 46.39 47.02 46.39 48.44 46.94 48.44 46.94
77 46.78 46.00 46.78 46.00 48.33 46.60 48.33 46.60
78 46.53 45.62 46.53 45.62 48.21 46.27 48.21 46.27
79 46.29 45.23 46.29 45.23 48.10 45.93 48.10 45.93
80 46.05 44.84 46.05 44.84 47.99 45.59 47.99 45.59
</TABLE>
73
