<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1995
REGISTRATION STATEMENT 33-79808
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
------------------
A. Exact name of trust: FKLA VARIABLE SEPARATE ACCOUNT
B. Name of depositor: FEDERAL KEMPER LIFE ASSURANCE COMPANY
C. Complete address of depositor's principal executive offices:
1 Kemper Drive
Long Grove, Illinois 60049
D. Name and complete address of agent for service:
DEBRA P. REZABEK, ESQ.
Federal Kemper Life Assurance Company
1 Kemper Drive
Long Grove, Illinois 60049
<TABLE>
<S> <C>
Copies To:
FRANK JULIAN, ESQ. JOAN E. BOROS, ESQ.
Federal Kemper Life Assurance Company Katten Muchin & Zavis
1 Kemper Drive 1025 Thomas Jefferson Street, N.W.
Long Grove, Illinois 60049 Washington, D.C. 20007
</TABLE>
E. Title and amount of securities being registered:
Units of Interests in the Separate Account under
Flexible Premium Variable Life Insurance Policies.
F. Proposed maximum aggregate offering price to the public of the
securities being registered.
Registration of Indefinite Amount of Securities pursuant to Rule 24f-2
under the Investment Company Act of 1940. (See G. Below)
G. Amount of filing Fee: An indefinite amount of the Registrant's
securities has been registered pursuant to a declaration under Rule 24f-2 under
the Investment Company Act of 1940, set out in Form S-6 Registration Statement
contained in File No. 33-79808. The Registrant intends to file a Rule 24f-2
Notice on or about February 28, 1996, for the fiscal year end December 31, 1995.
H. Approximate date of proposed public offering:
As soon as practicable after the effective date of this Registration Statement.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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REGISTRANT ELECTS TO BE GOVERNED BY THE PROVISIONS OF RULE 6E-3(T)(B)(13)(I)(B)
<PAGE> 2
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO.
OF
FORM N-8B-2 CAPTION IN PROSPECTUS
----------- ----------------------------------------------------------------------------------
<C> <S>
1. Cover Page
2. Cover Page
3. Not Applicable
4. Distribution of Policies
5. FKLA and the Separate Account; State Regulation of FKLA
6. FKLA and the Separate Account
7. Not Applicable
8. Experts
9. Legal Proceedings; Legal Considerations
10. FKLA and the Separate Account; The Fund; The Policy; Policy Rights and Benefits;
General Provisions; Voting Interests, Dollar Cost Averaging; Systematic Withdrawal
Plan; Federal Tax Matters
11. Cover Page; Summary; FKLA and the Separate Account; The Fund
12. Not Applicable
13. Charges and Deductions
14. The Policy
15. The Policy; Policy Benefits and Rights
16. Summary; The Policy
17. The Policy; Policy Benefits and Rights
18. The Fund
19. General Provisions
20. The Fund; General Provisions
21. Policy Benefits and Rights
22. Not Applicable
23. Not Applicable
24. General Provisions
25. FKLA and the Separate Account
26. Not Applicable
27. FKLA and the Separate Account
28. Directors and Officers of FKLA
29. FKLA and the Separate Account
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. FKLA and the Separate Account; Distribution of Policies
36. Not Applicable
37. Not Applicable
38. Distribution of Policies
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NO.
OF
FORM N-8B-2 CAPTION IN PROSPECTUS
----------- ----------------------------------------------------------------------------------
39. FKLA and the Separate Account; Distribution of Policies
<C> <S>
40. Not Applicable
41. FKLA and the Separate Account; Distribution of Policies
42. Not Applicable
43. Not Applicable
44. FKLA and the Separate Account; Charges and Deductions
45. Not Applicable
46. The Policy; Policy Benefits and Rights; Charges and Deductions
47. Summary; FKLA and the Separate Account; The Policy
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Cover Page; Summary; FKLA and the Separate Account; The Policy; Policy Benefits
and Rights; Charges and Deductions; General Provisions; Distribution of Policies
52. Summary; FKLA and the Separate Account; The Fund; General Provisions
53. Federal Tax Matters
54. Not Required
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements
</TABLE>
ii
<PAGE> 4
PROSPECTUS-- , 1995
--------------------------------------------------------------------------------
FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICY
--------------------------------------------------------------------------------
ISSUED BY
FEDERAL KEMPER LIFE ASSURANCE COMPANY
THROUGH ITS FKLA VARIABLE SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (708) 320-4500
This Prospectus describes a variable life insurance policy (the "Policy")
offered by Federal Kemper Life Assurance Company ("FKLA"). The Policy provides
for life insurance and for the accumulation of Cash Value on a variable basis.
Premiums under the Policy are flexible, subject to certain restrictions. The
Death Benefit and Cash Value of the Policy may vary to reflect the investment
experience of the FKLA Variable Separate Account (the "Separate Account").
The Policy meets the definition of "life insurance" under Section 7702 of
the Internal Revenue Code. The Policy may be issued as or become a modified
endowment contract. For a Policy treated as a modified endowment contract,
certain distributions will be includable in gross income for Federal income tax
purposes.
See "Federal Tax Matters", page 19 for a discussion of laws that affect the
tax treatment of the Policy.
An Owner may allocate premiums under a Policy to one or more of the
Subaccounts of the Separate Account and the Fixed Account. Each Subaccount
invests in shares of the underlying portfolio of the Kemper Investors Fund. The
following subaccounts are available: Money Market, Total Return, High Yield,
Equity, Government Securities, International and Small Capitalization Equity
("Small Cap"). The Fund is managed by Kemper Financial Services, Inc. The
accompanying Prospectus for the Fund describes the investment objectives and the
attendant risks of the portfolios of the Fund. The Cash Value in the Fixed
Account will accrue interest at a rate that is guaranteed by FKLA.
The Policy permits the Owner to choose from two death benefit options. FKLA
guarantees that the Death Benefit payable for a Policy will never be less than
the Death Benefit stated in the Policy Specifications, less Debt, as long as the
Policy is in force. There is no guaranteed Cash Value. If the Surrender Value is
insufficient to cover the charges under the Policy, the Policy will lapse. A
guarantee premium and guarantee period are stated in the Policy Specifications.
Payment of the guarantee premium is not required but if paid as specified under
the Policy will guarantee that the Policy will not lapse during the guarantee
period.
The Owner may examine the Policy and return it to FKLA for a refund during
the Free-Look Period.
It may not be advantageous to purchase a Policy as a replacement for
another type of life insurance policy, or to obtain additional insurance
protection if a flexible premium variable life insurance policy is already
owned.
This Prospectus generally describes only that portion of the Cash Value
allocated to the Separate Account. For a brief summary of the Fixed Account
option see "The Fixed Account Option" on page 7.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED
BY A CURRENT PROSPECTUS FOR THE FUND. ALL PROSPECTUSES
SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
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<S> <C>
DEFINITIONS................................................................................. 1
SUMMARY..................................................................................... 2
FKLA AND THE SEPARATE ACCOUNT............................................................... 4
THE FUND.................................................................................... 5
FIXED ACCOUNT OPTION........................................................................ 7
THE POLICY.................................................................................. 7
POLICY BENEFITS AND RIGHTS.................................................................. 9
CHARGES AND DEDUCTIONS...................................................................... 14
GENERAL PROVISIONS.......................................................................... 16
DOLLAR COST AVERAGING....................................................................... 18
SYSTEMATIC WITHDRAWAL PLAN.................................................................. 19
DISTRIBUTION OF POLICIES.................................................................... 19
FEDERAL TAX MATTERS......................................................................... 19
LEGAL CONSIDERATIONS........................................................................ 20
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................................................ 21
VOTING INTERESTS............................................................................ 21
STATE REGULATION OF FKLA.................................................................... 21
DIRECTORS AND OFFICERS OF FKLA.............................................................. 22
LEGAL MATTERS............................................................................... 23
LEGAL PROCEEDINGS........................................................................... 24
EXPERTS..................................................................................... 24
REGISTRATION STATEMENT...................................................................... 24
FINANCIAL STATEMENTS........................................................................ 24
APPENDICES.................................................................................. 53
</TABLE>
<PAGE> 6
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 last birthday.
BENEFICIARY--The person to whom the proceeds due on the Insured's death are
paid.
CASH VALUE--The sum of the value of Policy assets in the Separate Account,
Fixed Account and Loan Account.
DATE OF RECEIPT--Date of receipt means the valuation date during which a
request, form or payment is received at FKLA's Home Office. FKLA is deemed to
have received any request, form or payment on the date it is actually received
at the Home Office, provided that it is received before the close of the New
York Stock Exchange (which is normally 3:00 p.m. Long Grove time) on any date
when the New York Stock Exchange is open. Otherwise, it will be deemed to be
received on the next such day.
DEBT--Debt means (1) the principal of any outstanding loan, plus (2) any
loan interest due or accrued to FKLA.
FIXED ACCOUNT--The amount of assets held in the General Account
attributable to the fixed portion of the Policy.
FREE-LOOK PERIOD--The period of time in which an Owner may cancel the
Policy and receive a refund. The applicable period of time will depend on the
state in which the Policy is issued; however, it will be at least 10 days from
the date the Policy is received by the Owner.
FUND--The Kemper Investors Fund, an open-end diversified investment company
in which the Subaccounts of the Separate Account invest.
GENERAL ACCOUNT--The assets of FKLA 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 Policy
Loans.
MATURITY DATE--The Policy Date anniversary coinciding with or next
following the Insured's 99th birthday.
MONTHLY PROCESSING DATE--The same day in each month as the Policy Date.
MORTALITY AND EXPENSE RISK CHARGE--A charge deducted in the calculation of
the Accumulation Unit Value for the assumption of mortality risks and expense
guarantees.
PLANNED PREMIUM--The scheduled premium specified by the Owner in the
application.
POLICY DATE--The date shown in the Policy Specifications. The Policy Date
is the date used to determine Policy Years and Monthly Processing Dates. The
Policy Date is the date that insurance coverage takes effect subject to any
principles of conditional receipt under applicable law.
POLICY YEAR--Each year commencing with the Policy Date and each Policy Date
anniversary thereafter.
SEPARATE ACCOUNT VALUE--The portion of the Cash Value in the Subaccount(s)
of the Separate Account.
SPECIFIED AMOUNT--The amount chosen by the Owner and used to calculate the
death benefit. The Specified Amount is shown in the Policy Specifications.
SUBACCOUNT--A subdivision of the Separate Account.
SURRENDER VALUE--The surrender value of a Policy is (1) the Cash Value
minus (2) any applicable Surrender Charge; minus (3) any Debt.
TRADE DATE--The date 30 days after the Issue Date. The Trade Date is the
date on which initial investment allocations are made pursuant to the Owner's
elections.
VALUATION DATE--Each business day on which valuation of the assets of the
Separate Account is required by applicable law, which currently is each day that
the New York Stock Exchange is open for trading.
VALUATION PERIOD--The period that starts at the close of a Valuation Date
and ends at the close of the next succeeding Valuation Date.
1
<PAGE> 7
SUMMARY
The following summary should be read in conjunction with the detailed
information in this prospectus. You should refer to the heading "Definitions"
for the meaning of certain terms. Variations from the information appearing in
this prospectus due to individual state requirements are described in
supplements which are attached to this prospectus, or in endorsements to the
Policy, as appropriate. Unless otherwise indicated, the description of the
Policy contained in this prospectus assumes that the Policy is in force, that
there is no indebtedness, and that current Federal tax laws apply.
The Owner of a Policy pays a premium for life insurance coverage on the
person insured. The Policy is a flexible premium policy, so subject to certain
limitations, a Policy Owner may choose the amount and frequency of premium
payments. The Policy provides for a Surrender Value which is payable if the
Policy is terminated during an Insured's lifetime. The Death Benefit and Cash
Value of the Policy may increase or decrease to reflect investment experience.
There is no guaranteed Cash Value. If the Surrender Value is insufficient to pay
charges under the Policy, the Policy will lapse unless an additional premium
payment or loan repayment is made. A guarantee premium and a guarantee period
are stated in the Policy Specifications. The Policy is guaranteed to remain in
force during the guarantee period provided the sum of the premiums paid less
withdrawals and debt is equal to or greater than the sum of the guarantee
premiums. (See "The Policy--Premiums and Allocation of Premiums and Separate
Account Value," pages 7 and 8, "Charges and Deductions," page 14, and "Policy
Benefits and Rights," page 9.)
Under certain circumstances, 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. Excess premiums paid may also cause the
Policy to become a modified endowment contract. For a Policy treated as a
modified endowment contract, certain distributions will be included in the
Owner's gross income for purposes of Federal income tax (See "Federal Tax
Matters," page 19.)
The purpose of the Policy is to provide insurance protection for the
beneficiary named therein. No claim is made that the Policy is in any way
similar or comparable to a systematic investment plan of a mutual fund.
POLICY BENEFITS
Cash Value. The Policy provides for a Cash Value. The Cash Value will
reflect the amount and frequency of premium payments, the investment experience
of the selected Subaccounts, any values in the Fixed Account and Loan Account,
and charges imposed in connection with the Policy. The Owner bears the entire
investment risk on that portion of the net premiums and Cash Value allocated to
the Separate Account. FKLA does not guarantee a minimum Separate Account Value.
(See "Policy Benefits and Rights--Cash Value," page 11.)
The Owner may surrender a Policy at any time and receive the Surrender
Value, which equals the Cash Value less any applicable surrender charge and
outstanding Debt. Partial withdrawals are also available. (See "Policy Benefits
and Rights--Surrender Privilege," page 13.)
Policy Loans. The Owner may borrow up to 95% of the Policy's Cash Value
minus applicable surrender charges, subject to the requirements of the Internal
Revenue Code. The minimum amount of a loan is $500. Interest at an effective
annual rate of 5.00% will be charged on outstanding loan amounts. (See "Federal
Tax Matters," page 19.)
When a loan is made, a portion of the Policy's Cash Value equal to the
amount of the loan will be transferred from the Separate Account and the Fixed
Account (proportionately, unless the Owner requests otherwise) to the Loan
Account. Cash Values within the Loan Account will earn 3.00% annual interest for
the first nine Policy Years and 5% annual interest thereafter. Such earnings
will be allocated to the Loan Account. (See "Policy Benefits and Rights--Policy
Loans," page 13.)
If the Policy is treated as a modified endowment contract, a loan will be
treated as a distribution for Federal income tax purposes and may be subject to
tax, withholding and penalties. (See "Federal Tax Matters," page 19.)
Death Benefits. As long as the Policy remains in force, the Policy provides
a death benefit payment upon the death of the Insured. The Policy contains two
death benefit options. Under Option A, the death benefit is the Specified Amount
stated in the Policy Specifications. Under Option B, the death benefit is the
Specified Amount stated in the Policy Specifications plus the Cash Value. In
either case, the death benefit will not be less than a specified multiple of the
Cash Value. The death benefit payable will be reduced by any Debt. (See "Policy
Benefits and Rights--Death Benefits," page 9.)
2
<PAGE> 8
PREMIUMS
The Owner has flexibility concerning the amount and frequency of premium
payments. At the time of application, the Owner will determine a scheduled
premium. However, the Owner will not be required to adhere to the schedule and,
subject to certain restrictions, may make premium payments in any amount and at
any frequency. The amount, frequency, and period of time over which an Owner
pays premiums may affect whether the Policy will be classified as a modified
endowment contract. The minimum premium payment is $50.
Payment of the scheduled premium will not guarantee that a Policy will
remain in force. Instead, the duration of the Policy depends on the Policy's
Surrender Value. A guarantee premium and a guarantee period are stated in the
Policy Specifications. A policy will remain in force during the guarantee period
provided the sum of the premiums paid less withdrawals and Debt is equal to or
greater than the sum of the guarantee premiums. (See "The Policy--Premiums,"
page 7.)
THE SEPARATE ACCOUNT
Allocation of Premiums. The portion of the premium available for allocation
equals the premium paid less applicable charges. An Owner indicates in the
application for the Policy the percentages of premium to be allocated among the
Subaccounts of the Separate Account and the Fixed Account. The Separate Account
currently consists of seven Subaccounts, each of which invests in shares of a
designated portfolio of the Kemper Investors Fund. The Kemper Investors Fund is
managed by Kemper Financial Services, Inc., an affiliate of FKLA.
On the day following the date of receipt, the initial premium less
applicable charges will be allocated to the Money Market Subaccount. On the
Trade Date, which is thirty days from the Issue Date, the Separate Account Value
in the Money Market Subaccount will be allocated among the Subaccounts and the
Fixed Account in accordance with the Owner's instructions in the application.
(See "The Policy -- Policy Issue," page 7.)
Transfers. An Owner may transfer Separate Account Value among the
Subaccounts. One transfer of all or part of the Separate Account Value may be
made within a fifteen day period. Transfers are also permitted between the Fixed
Account and the Subaccounts, subject to restrictions. (See "Allocation of
Premiums and Separate Account Value--Transfers," page 8.)
THE FUND
The following portfolios of the Kemper Investors Fund are currently
available for investment by the Separate Account:
Money Market Portfolio, invests in U.S. dollar denominated money market
instruments maturing in 12 months or less.
Total Return Portfolio, invests in a combination of debt securities and
common stocks.
High Yield Portfolio, invests in fixed-income securities, including lower
rated and unrated securities which may entail relatively greater risk of loss of
income or principal but may offer a current yield or yield to maturity which is
higher.
Equity Portfolio, invests primarily in common stocks or securities
convertible into or exchangeable for common stocks.
Government Securities Portfolio, invests primarily in direct obligations of
the U.S. Treasury or obligations issued or guaranteed by agencies and
instrumentalities of the United States.
International Portfolio, invests primarily in common stocks of established
non-United States companies believed to have potential for capital growth.
Small Cap Portfolio, invests primarily in the equity securities of smaller
companies, i.e., those having a market capitalization of $1 billion or less at
the time of investment.
For a more detailed description of the Fund, see "The Fund," page 5, the
Fund prospectus, and Statement of Additional Information available upon request.
CHARGES
A state and local premium tax charge of 2.5% is deducted from each premium
payment under the Policy prior to allocation of the net premium. In addition, a
charge of 1% of each premium payment will be deducted to compensate FKLA for
higher corporate income tax liability resulting from changes in the tax law made
by the Omnibus Budget Reconciliation Act of 1990. (See Charges and
Deductions--Deductions from Premiums, page 14.)
3
<PAGE> 9
No other charges are currently made from premium or the Separate Account
for Federal, state or other taxes. Should FKLA determine that such taxes may be
imposed, it may make deductions from the Separate Account to pay those taxes.
(See "Federal Tax Matters," page 19.)
Deductions will be made from the Policy's Cash Value in each Subaccount and
the Fixed Account on the Policy Date and on each Monthly Processing Date for the
cost of providing life insurance coverage for the Insured. In addition, FKLA
deducts an asset charge from each Subaccount on a daily basis for the assumption
by FKLA of certain mortality and expense risks incurred in connection with the
Policy, at an annual rate of .60%. This charge may be increased but is
guaranteed not to exceed .90%. (See "Charges and Deductions--Cost of Insurance
Charge and Mortality and Expense Risk Charge," pages 14 and 15.)
A $5 per month administrative expense charge is deducted from the Policy's
Cash Value on each Monthly Processing Date. (See "Charges and
Deductions--Monthly Administrative Charges," page 15.)
If the Policy is surrendered or if the Cash Value is applied under a
Settlement Option, a surrender charge on the premiums paid under the Policy will
be deducted from the amount payable. A surrender charge may also apply to a
partial withdrawal. The surrender charge starts at 6% in the first five Policy
Years and reduces by 1% in Policy Years 6 through 9 and by 2% in Policy Year 10
so that there is no charge in the tenth and later Policy Years. In addition, a
$25 withdrawal charge will be deducted for each withdrawal. (See "Policy
Benefits and Rights--Surrender Privilege," page 14.)
In addition, the Subaccounts of the Separate Account purchase shares of the
Fund. For fees and expenses of the Fund, see the prospectus for the Fund.
TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW
The Cash Value, while it remains in the Policy, and the Death Benefit
should be subject to the same Federal income tax treatment as the cash value
under a conventional fixed benefit life insurance policy. Under existing tax
law, if the Policy is not treated as a modified endowment contract, the Owner is
generally not deemed to be in receipt of the Cash Value under a Policy until a
distribution occurs through a withdrawal or surrender. If the Policy is treated
as a modified endowment contract, a loan will also be treated as a distribution.
A change of Owners, an assignment, a loan or a surrender of the Policy may have
tax consequences.
Death Benefits payable under the Policy should be completely excludable
from the gross income of the Beneficiary. As a result, the Beneficiary generally
will not be subject to income tax on the Death Benefit. (See "Federal Tax
Matters," page 19.)
FREE-LOOK PERIOD
The Owner is granted a period of time to examine a Policy and return it for
a refund. The applicable period of time will depend on the state in which the
Policy is issued; however, it will be at least 10 days from the date the Policy
is received by the Owner. (See "Policy Benefits and Rights--Free-Look Period,"
page 14.)
ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES, DEATH BENEFITS
Tables in the Appendix illustrate the Separate Account Values, Surrender
Values and Death Benefits based upon certain hypothetical assumed rates of
return for the Separate Account and the charges deducted under the Policy.
FKLA AND THE SEPARATE ACCOUNT
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Federal Kemper Life Assurance Company ("FKLA") is a stock life insurance
company organized under the laws of the State of Illinois. FKLA is a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a public financial
services holding company. FKLA offers life insurance and annuity products and is
admitted to do business in the District of Columbia and in all states except New
York.
FKLA Variable Separate Account (the "Separate Account") was established by
FKLA as a separate investment account on May 27, 1994. The Separate Account will
receive and invest the net premiums
4
<PAGE> 10
under the Policy. In addition, the Separate Account may receive and invest net
premiums for other variable life insurance policies offered by FKLA.
The Separate Account is administered and accounted for as part of the
general business of FKLA, but the income, capital gains or capital losses of the
Separate Account are credited to or charged against the assets held in the
Separate Account, without regard to any other income, capital gains or capital
losses of any other separate account or arising out of any other business which
FKLA may conduct. The benefits provided under the Policy are obligations of
FKLA.
The Separate Account is currently divided into seven Subaccounts. Each
Subaccount invests exclusively in shares of the Fund designated by the Policy
Owner. Income and both realized and unrealized gains or losses from the assets
of each Subaccount generally are credited to or charged against that Subaccount
without regard to income, gains or losses from any other Subaccount of the
Separate Account or arising out of any business FKLA may conduct.
The Separate Account has been registered with the Securities and Exchange
Commission ("Commission") as a unit investment trust under the Investment
Company Act of 1940 (the "1940 Act"). Such registration does not involve
supervision by the Commission of the management, investment practices or
policies of the Separate Account or FKLA.
THE FUND
KEMPER INVESTORS FUND
The Separate Account invests in shares of the Kemper Investors Fund, a
series type mutual fund registered with the Commission as an open-end,
diversified management investment company. Registration of the Fund does not
involve supervision of its management, investment practices or policies by the
Commission. The Fund is designed to provide an investment vehicle for variable
life insurance and variable annuity contracts. Shares of the Fund currently are
sold only to insurance company separate accounts. In addition to the Separate
Account, shares of the Fund may be sold to variable life insurance and variable
annuity separate accounts of insurance companies not affiliated with FKLA. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts of companies unaffiliated with FKLA, or for both
variable life insurance separate accounts and variable annuity separate
accounts, to invest simultaneously in the Fund. Currently neither FKLA nor the
Fund foresees any such disadvantages to either variable life insurance or
variable annuity owners. Management of the Fund has an obligation to monitor
events to identify material conflicts between such owners and determine what
action, if any, should be taken. In addition, if FKLA believes that the Fund's
response to any of those events or conflicts insufficiently protects the Owners,
it will take appropriate action on its own.
The Separate Account invests in the following Portfolios of the Fund: Money
Market Portfolio, Total Return Portfolio, High Yield Portfolio, Equity
Portfolio, Government Securities Portfolio, International Portfolio and Small
Cap Portfolio. 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 or losses of one Portfolio generally have no effect on the
investment performance of any other Portfolio.
The investment objectives and policies of the Fund's portfolios in which
the Separate Account invests are summarized below:
Money Market Portfolio: This Portfolio seeks to provide maximum current
income to the extent consistent with stability of principal. It will maintain a
dollar weighted average portfolio maturity of 90 days or less. This Portfolio
pursues its objective of maximum income and stability of principal by investing
in money market securities such as U.S. Treasury obligations, commercial paper,
and certificates of deposit and bankers' acceptances of domestic and foreign
banks, including foreign branches of domestic banks, and will enter into
repurchase agreements.
Total Return Portfolio: This Portfolio seeks a high total return, a
combination of income and capital appreciation, by investing in a combination of
debt securities and common stocks. The Portfolio's investments will normally
consist of fixed-income and equity securities. Fixed-income securities will
include bonds and other debt securities and preferred stocks, some of which may
have a call on common stocks through attached warrants or a conversion
privilege. Equity investments normally will consist of common stocks and
securities convertible into or exchangeable for common stocks; however the
Portfolio may also make private placement investments (which are normally
restricted securities).
5
<PAGE> 11
High Yield Portfolio: This Portfolio seeks to provide a high level of
current income by investing in fixed-income securities, including lower rated
and unrated securities which may entail relatively greater risk of loss of
income or principal but may offer a current yield or yield to maturity which is
higher. Lower and unrated securities, which are sometimes referred to by the
popular press as "junk bonds," have widely varying characteristics and quality.
The Portfolio invests in U.S. Government, corporate, and other notes and bonds
paying high current income. See the prospectus for the Fund for additional
information and special risk factors.
Equity Portfolio: This Portfolio seeks maximum appreciation of capital
through diversification of investment securities having potential for capital
appreciation. Current income will not be a significant factor. This Portfolio's
investments normally will consist of common stocks and securities convertible
into or exchangeable for common stocks; however, it may also make private
placement investments (which are normally restricted securities).
Government Securities Portfolio: This Portfolio seeks high current return
consistent with preservation of capital from a portfolio composed primarily of
U.S. Government securities. The Portfolio will also invest in fixed-income
securities other than U.S. Government securities, and will engage in options and
financial futures transactions. The Portfolio may purchase or sell portfolio
securities on a when-issued or delayed delivery basis. The Portfolio's current
return is sought from interest income and net short-term gains on securities and
options and futures transactions.
International Portfolio: This Portfolio seeks a total return, a combination
of capital growth and income, principally through an internationally diversified
portfolio of equity securities. While this Portfolio invests principally in
equity securities of non-United States issuers, this Portfolio may also invest
in convertible and debt securities of non-United States issuers and foreign
currencies.
Small Cap Portfolio: This Portfolio seeks maximum appreciation of capital.
At least 65% of its total assets normally will be invested in the equity
securities of smaller companies, i.e., those having a market capitalization of
$1 billion or less at the time of investment. Current income will not be a
significant factor. This Portfolio's investments normally will consist primarily
of common stocks and securities convertible into or exchangeable for common
stocks and to a limited degree in preferred stocks and debt securities.
There is no assurance that any of the Portfolios of the Fund will achieve
its stated objective. More detailed information, including a description of
risks involved in investing in each of the Portfolios, may be found in the
prospectus for the Fund, which must accompany or precede this Prospectus, and
the Fund's Statement of Additional Information available upon request from
Federal Kemper Life Assurance Company, 1 Kemper Drive, Long Grove, Illinois
60049 or Kemper Financial Services, Inc., 120 South LaSalle Street, Chicago,
Illinois 60603.
Kemper Financial Services, Inc. ("KFS" or the "Adviser"), an affiliate of
FKLA, is the investment adviser to the Fund and manages its daily investments
and business affairs, subject to the policies established by the trustees of the
Fund. For its advisory services to the Portfolios, the Adviser receives
compensation monthly at annual rates equal to .50 of 1%, .55 of 1%, .60 of 1%,
.60 of 1%, .55 of 1%, .75 of 1% and .65% of 1% of the average daily net asset
values of the Money Market Portfolio, the Total Return Portfolio, the High Yield
Portfolio, the Equity Portfolio, the Government Securities Portfolio, the
International Portfolio and the Small Cap Portfolio, respectively.
CHANGE OF INVESTMENTS
FKLA reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares held by the Separate Account or
that the Separate Account may purchase. FKLA reserves the right to eliminate the
shares of any of the portfolios of the Fund and to substitute shares of another
portfolio of the Fund or of another investment company, if the shares of a
portfolio are no longer available for investment, or if in its judgment further
investment in any portfolio becomes inappropriate in view of the purposes of the
Policy or the Separate Account. FKLA may also eliminate or combine one or more
subaccounts, transfer assets, or it may substitute one subaccount for another
subaccount, if, in its sole discretion, marketing, tax or investment conditions
warrant. FKLA will not substitute any shares attributable to an Owner's interest
in a Subaccount of the Separate Account without notice to the Owner and prior
approval of the Commission, to the extent required by the 1940 Act or other
applicable law. 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.
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<PAGE> 12
FKLA also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Fund, or
in shares of another investment company, with specified investment objectives.
New subaccounts may be established when, in the sole discretion of FKLA,
marketing needs or investment conditions warrant, and any new subaccounts may be
made available to existing Owners as determined by FKLA.
If deemed by FKLA to be in the best interests of persons having voting
interests under the Policy, the Separate Account may be: (a) operated as a
management company under the 1940 Act; (b) deregistered under that Act in the
event such registration is no longer required; or (c) combined with other FKLA
separate accounts. To the extent permitted by law, FKLA may also transfer the
assets of the Separate Account associated with the Policy to another separate
account, or to the General Account.
FIXED ACCOUNT OPTION
Net premiums allocated by Policy Owners to the Fixed Account of the Policy
and transfers to the Fixed Account become part of the General Account of FKLA,
which supports insurance and annuity obligations. Because of exemptive and
exclusionary provisions, interests in the Fixed Account have not been registered
under the Securities Act of 1933 ("1933 Act") nor is the Fixed Account
registered as an investment company under the Investment Company Act of 1940
("1940 Act"). Accordingly, neither the Fixed Account nor any interests therein
generally are subject to the provisions of the 1933 or 1940 Acts and FKLA has
been advised that the staff of the Securities and Exchange Commission has not
reviewed the disclosures in this prospectus which relate to the fixed portion.
Disclosures regarding the Fixed Account, however, may be subject to certain
generally applicable provisions of the Federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
Under the Fixed Account Option offered under the Policies, FKLA allocates
payments to its General Account and pays a fixed interest rate for stated
periods. This Prospectus describes only the element of the Contract pertaining
to the Separate Account except where it makes specific reference to fixed
accumulation and settlement elements.
The Policies guarantee that payments allocated to the Fixed Account will
earn a minimum fixed interest rate of 3%. FKLA, at its discretion, may credit
interest in excess of 3%. FKLA reserves the right to change the rate of excess
interest credited as provided under the terms of the Policy. FKLA also reserves
the right to declare separate rates of excess interest for net premiums or
amounts transferred at designated times, with the result that amounts at any
given designated time may be credited with a higher or lower rate of excess
interest than the rate or rates of excess interest previously credited to such
amounts and net premiums or amounts transferred at any other designated time.
THE POLICY
POLICY ISSUE
Before FKLA will issue a Policy, it must receive a completed application
and a full initial premium at its Home Office. A Policy ordinarily will be
issued only for Insureds Age 1 through 85 who supply satisfactory evidence of
insurability to FKLA. Acceptance of an application is subject to underwriting by
FKLA. FKLA reserves the right to decline an application for any reason.
After underwriting is complete and the Policy is delivered to the Owner,
insurance coverage under the Policy will be deemed to have begun as of the
Policy Date. (See "Premiums," below.)
PREMIUMS
Premiums are to be paid to FKLA at its Home Office. (See "Distribution of
Policies.") Checks ordinarily must be made payable to FKLA.
Planned Premiums. When applying for a Policy, a Policy Owner will specify a
Planned Premium payment that provides for the payment of level premiums over a
specified period of time. However, the Policy Owner is not required to pay
Planned Premiums.
The minimum monthly premium that will be accepted by FKLA is $50. For modes
other than monthly the minimums are: annual $500; semi-annual $300; quarterly
$150. The amount, frequency and period of time over which a Policy Owner pays
premiums may affect whether the Policy will be classified as a modified
endowment contract, which is a type of life insurance contract subject to
different tax treatment
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<PAGE> 13
than conventional life insurance contracts for certain pre-death distributions.
Accordingly, variations from the Planned Premiums on a Policy that is not
otherwise a modified endowment contract may result in the Policy becoming a
modified endowment contract for tax purposes.
Payment of the Planned Premium will not guarantee that a Policy will remain
in force. Instead, the duration of the Policy depends upon the Policy's
Surrender Value. Even if Planned Premiums are paid, the Policy will lapse any
time Surrender Value is insufficient to pay the current monthly deduction 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 is the period that ends on the third
Policy anniversary. During the guarantee period, the policy will remain in force
and no grace period will begin provided that the total premiums received, less
any withdrawals and any outstanding loans, equals or exceeds the monthly
guarantee premium times the number of months since the Policy Date, including
the current month.
FKLA may reject or limit any premium payment that is below the current
minimum premium amount requirements, or that would increase the death benefit by
more than the amount of the premium. All or a portion of a premium payment will
be rejected and returned to the Owner if it would disqualify the Policy as life
insurance under the Internal Revenue Code.
Certain charges will be deducted from each premium payment. (See "Charges
and Deductions.") The remainder of the premium, known as the net premium, will
be allocated as described below under "Allocation of Premiums and Separate
Account Value."
Policy Date. The Policy Date is the date used to determine Policy Years and
Monthly Processing Dates. The Policy Date will be the date that coverage on the
Insured takes effect. If such date is the 29th, 30th, or 31st of a month, the
Policy Date will be the first of the following month.
In the event an application is declined by FKLA, the Cash Value in the
Money Market Subaccount plus the total amount of monthly deductions and
deductions against premiums will be refunded.
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.")
ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE
Allocation of Premiums. The initial net premium will be allocated to the
Money Market Subaccount. The Separate Account Value will remain in the Money
Market Subaccount until the Trade Date, which is 30 days after the Issue Date.
On the Trade Date, the Separate Account Value in the Money Market Subaccount
will be allocated to the Subaccounts and the Fixed Account elected by the Owner
in the application for the Policy. Additional premiums received will continue to
be allocated in accordance with the Owner's instructions in the application
unless contrary written instructions are received. Once a change in allocation
is made, all future premiums will be allocated in accordance with the new
allocation, unless contrary written instructions are received. The minimum
amount of any premium that may be allocated to a Subaccount is $50.
The Separate Account Value will vary with the investment experience of the
chosen Subaccounts. The Owner bears the entire investment risk.
Transfers. After the Trade Date, Separate Account Value may be transferred
among the Subaccounts and into the Fixed Account. One transfer of all or a part
of the Separate Account Value may be made within a fifteen day period. All
transfers made during a business day will be treated as one request.
Fixed Account Value may be transferred to one or more Subaccounts. One
transfer of part of the 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 FKLA, or by
telephone authorization under forms authorized by FKLA. (See "General
Provisions--Written Notices and Requests.") The minimum partial transfer amount
is $500. No partial transfer may be made if the value of the Owner's remaining
interest in a Subaccount or the Fixed Account, from which amounts are to be
transferred, would be less than $500 after such transfer. Transfers will be
based on the Accumulation Unit values next determined following receipt of
valid, complete transfer instructions by FKLA. The transfer provision may be
suspended, modified or terminated at any time by FKLA. FKLA disclaims all
liability for acting in good faith in
8
<PAGE> 14
following instructions which are given in accordance with procedures established
by FKLA, including requests for personal identifying information, that are
designed to limit unauthorized use of the privilege. Therefore, a Policy Owner
would bear this risk of loss in the event of a fraudulent telephone transfer.
Automatic Asset Reallocation. A Policy Owner may elect to have transfers
made automatically among the Subaccounts of the Separate Account on an annual or
a quarterly basis so that Cash Value is reallocated to match the Policy Owner's
predefined asset allocation program. An election to participate in the automatic
asset reallocation program must be in writing in the form prescribed by FKLA and
returned to FKLA at its home office.
POLICY LAPSE AND REINSTATEMENT
Lapse. Lapse will occur when the Surrender Value of a Policy is
insufficient to cover the monthly deductions, and a grace period expires without
a sufficient payment being made. (See "Charges and Deductions.")
A grace period of 61 days will be given to the Owner. It begins when notice
is sent that the Surrender Value of the Policy is insufficient to cover the
monthly deductions. Failure to make a premium payment or loan repayment during
the grace period sufficient to keep the Policy in force for three months will
cause the Policy to 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 the most current allocation instructions, unless otherwise
requested. Amounts over and above the amounts necessary to prevent lapse may be
paid as additional premiums, however, to the extent otherwise permitted. (See
"The Policy--Premiums.")
FKLA will not accept any payment that would cause the total premium payment
to exceed the maximum payment permitted by the Code for life insurance under the
guideline premium limits. However, the Owner may voluntarily repay a portion of
Debt to avoid lapse. (See "Federal Tax Matters.")
If premium payments have not exceeded the maximum payment permitted by the
Code, the Owner may choose to make a larger payment than the minimum required
payment to avoid the recurrence of the potential lapse of coverage. The Owner
may also combine premium payments with Debt repayments.
The death benefit payable during the grace period will be the Death Benefit
in effect immediately prior to the grace period, less any Debt and any unpaid
monthly deductions.
Reinstatement. If a Policy lapses because of insufficient Surrender Value
to cover the monthly deductions, and it has not been surrendered for its
Surrender Value, it may be reinstated at any time within three years after the
date of lapse. Tax consequences may affect the decision to reinstate.
Reinstatement is subject to:
(1) receipt of evidence of insurability satisfactory to FKLA;
(2) payment of a minimum premium sufficient to cover monthly deductions for
the grace period and to keep the Policy in force three months; and
(3) payment or reinstatement of any Debt against the Policy which existed
at the date of termination of coverage.
The effective date of reinstatement of a Policy will be the Monthly
Processing Date that coincides with or next follows the date the application for
reinstatement is approved by FKLA. Suicide and incontestability provisions will
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.
A Policy Owner may select one of two death benefit options: Option A or
Option B. An applicant designates the death benefit option in the application.
Subject to certain restrictions, the Owner can change the death benefit option
selected. So long as the Policy remains in force, the death benefit under either
option will never be less than the Specified Amount.
The Specified Amount is chosen by the Owner on the application and is
stated in the Policy Specifications.
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<PAGE> 15
Option A. Under Option A, the death benefit will be equal to 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 age of the Insured and will
be at least equal to the cash value corridor in Section 7702 of the Internal
Revenue Code. The death benefit percentage is 250% for an Insured at Age 40 or
under, and it declines for older Insureds. A table showing the death benefit
percentages is in the Appendix C to this Prospectus and in the Policy.
Option B. Under Option B, the death benefit will be equal to 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 and as stated in the Appendix. The death benefit under
Option B will always vary 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 Cash
Values that vary as shown, and which assume an Insured is Age 35 at the time of
death and that there is no outstanding Debt.
<TABLE>
<CAPTION>
POLICY POLICY
POLICY I II 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 is equal to $100,000 since
the death benefit is the greater of the Specified Amount ($100,000) or the Cash
Value at the date of death multiplied by the death benefit percentage ($25,000 X
250% = $62,500). For both Policies II and III under Option A, the Cash Value
multiplied by the death benefit percentage ($50,000 X 250% = $125,000 for Policy
II; $75,000 X 250% = $187,500 for Policy III) is greater than the Specified
Amount ($100,000), so the death benefit is equal to the higher value. Under
Option B, the death benefit for Policy I is equal to $125,000 since the death
benefit is the greater of Specified Amount plus Cash Value ($100,000 + $25,000 =
$125,000) or the Cash Value multiplied by the death benefit percentage ($25,000
X 250% = $62,500). Similarly, in Policy II, Specified Amount plus Cash Value
($100,000 + $50,000 = $150,000) is greater than Cash Value multiplied by the
death benefit percentage ($50,000 X 250% = $125,000). In Policy III, the Cash
Value multiplied by the death benefit percentage ($75,000 X 250% = $187,500) is
greater than the Specified Amount plus Cash Value ($100,000 + $75,000 =
$175,000), so the death benefit is equal to the higher value.
All calculations of death benefit will be 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 a payment plan offered under the
Policy. The Policy should be consulted for details.
Death Benefits under the Policy will ordinarily be paid within seven days
after FKLA receives all documentation required for such a payment. Payments may
be postponed in certain circumstances. (See "General Provisions -- Postponement
of Payments")
CHANGES IN DEATH BENEFIT OPTION
After the first Policy Year, a Policy Owner may request that the death
benefit under the Policy be changed from Option A to Option B, or from Option B
to Option A. Changes in the death benefit option may be made only once per
Policy Year and should be made in writing to FKLA's Home Office. The effective
date of any such change is the next Monthly Processing Date after the change is
accepted.
A change in the death benefit from Option A to Option B will result in a
reduction in the Specified Amount of the Policy by the amount of the Policy's
Cash Value, with the result that the death benefit payable under Option B at the
time of the change will equal that which would have been payable under Option A
immediately prior to the change. The change in option will affect the
determination of the death benefit since Cash Value will then be added to the
new Specified Amount, and the death benefit will then vary with Cash Value.
A change in the death benefit from Option B to Option A will result in an
increase in the Specified Amount of the Policy by the amount of the Policy's
Cash Value, with the result that the death benefit payable under Option A at the
time of the change will equal that which would have been payable under Option B
immediately prior to the change. However, the change in option will affect the
determination of
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<PAGE> 16
the death benefit since the Cash Value will no longer be added to the Specified
Amount in determining the death benefit. From that point on, the death benefit
will equal 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 since this charge varies with the net amount at risk, which
generally is the amount by which the death benefit exceeds Cash Value. (See
"Charges and Deductions--Cost of Insurance Charge.") Assuming that the Policy's
death benefit would not be equal to Cash Value times a death benefit percentage
under either Option A or B, changing from Option B to Option A will generally
decrease the future net amount at risk, and therefore decrease the future cost
of insurance charges. Changing from Option A to Option B will generally result
in a net amount at risk that remains level. Such a change, however, will result
in an increase in the cost of insurance charges over time, since the cost of
insurance rates increase with the insured's Age.
CHANGES IN SPECIFIED AMOUNT
After the first Policy Year, a Policy Owner may request an increase or
decrease in the Specified Amount under a Policy subject to approval from FKLA. A
change in Specified Amount may only be made once per Policy Year and must be in
an amount at least equal to $10,000. Increases are not allowed after the Insured
attains age 85. Increasing the Specified Amount could increase the death benefit
under a Policy, and decreasing the Specified Amount could decrease the death
benefit. (See "Federal Tax Matters.") The amount of change in the death benefit
will depend, among other things, upon the death benefit option chosen by the
Owner and the degree to which the death benefit under a Policy exceeds the
Specified Amount prior to the change. Changing the Specified Amount could affect
the subsequent level of the death benefit while the Policy is in force and the
subsequent level of Policy values. An increase in Specified Amount may increase
the net amount at risk under a Policy, which will increase an Owner's cost of
insurance charge and the guarantee premium amount. However, the guarantee period
will not be extended as a result of an increase in Specified Amount. Conversely,
a decrease in Specified Amount may decrease the net amount at risk, which will
decrease an Owner's cost of insurance charge. A decrease in Specified Amount
will not decrease the guarantee premium.
Increases. Additional evidence of insurability satisfactory to FKLA will be
required for an increase in Specified Amount.
Decreases. Any decrease in Specified Amount will first be applied to the
most recent increases successively, then to the original Specified Amount. A
decrease will not be permitted if the Specified Amount would fall below the
lesser of the initial Specified Amount or $25,000. If a decrease in the
Specified Amount would result in total premiums paid exceeding the premium
limitations prescribed under tax law to qualify the Policy as a life insurance
contract, FKLA will refund the Policy Owner the amount of such excess above the
premium limitations.
FKLA reserves the right to disallow a requested decrease, and will not
permit a requested decrease, among other reasons, (1) if compliance with the
guideline premium limitations under tax law resulting from the requested
decrease would result in immediate termination of the Policy, or (2) if, to
effect the requested decrease, payments to the Owner would have to be made from
Cash Value for compliance with the guideline premium limitations, and the amount
of such payments would exceed the Surrender Value under the Policy.
Any request for an increase or decrease in Specified Amount must be made by
written application to FKLA's Home Office. It will become effective on the
Monthly Processing Date on or next following FKLA's acceptance of the request.
If the Owner is not the Insured, FKLA will also require the consent of the
Insured before accepting a request.
BENEFITS AT MATURITY
If the Insured is living on the Policy Date anniversary following the
Insured's Age 99, FKLA will pay the Owner the Surrender Value of the Policy, on
surrender of the Policy to FKLA. On the Maturity Date, the Policy will terminate
and FKLA will have no further obligations under the Policy.
CASH VALUE
The Policy's Cash Value will reflect the investment experience of the
selected Subaccounts, the frequency and amount of premiums paid, transfers
between Subaccounts, any Fixed Account or Loan Account values, and any charges
assessed in connection with the Policy. An Owner may make partial withdrawals of
Cash Value or surrender the Policy and receive the Policy's Surrender Value,
which equals
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<PAGE> 17
the Cash Value less surrender charges and Debt. (See "Surrender Privilege.")
There is no minimum guaranteed Cash Value.
Calculation of Cash Value. The Cash Value of the Policy is the total of the
Policy's Separate Account Value, Fixed Account Value and Loan Account value. The
Cash Value is determined on each Valuation Date. It will first be calculated on
the Policy Date. On that date, the Cash Value equals the initial premium, less
the monthly deductions for the first Policy Month. (See "Charges and
Deductions.")
On any Valuation Date during the Policy Year, the Policy's Separate Account
Value in any Subaccount will equal:
(1) The Policy's Separate Account Value in the Subaccount at the end
of the preceding Valuation Period, multiplied by the Investment Experience
Factor (defined below) for the current Valuation Period; plus
(2) Any net premiums received during the current Valuation Period
which are allocated to the Subaccount; plus
(3) All amounts transferred to the Subaccount, either from another
Subaccount or the Fixed Account or from the Loan Account in connection with
the repayment of a Policy loan (see "Policy Benefits and Rights--Policy
Loans,") during the current Valuation Period; minus
(4) The pro rata portion of the monthly cost of insurance charge,
administrative charge, and any other charges assessed to the Subaccount.
(See "Charges and Deductions--Cost of Insurance Charge."); minus
(5) All amounts transferred from the Subaccount during the current
Valuation Period; minus
(6) All amounts withdrawn from the Subaccount during the current
Valuation Period; minus
(7) All amounts loaned from the Subaccount during the current
Valuation Period.
There will also be Cash Value in the Loan Account if there is a Policy loan
outstanding. The Loan Account is credited with amounts transferred from
Subaccounts in connection with Policy loans. The Loan Account balance accrues
daily interest at an effective annual rate of 3.00% during the first nine Policy
years and 5.00% thereafter. (See "Policy Benefits and Rights--Policy Loans.")
The Cash Value in the Fixed Account is credited with interest at the annual
rate declared by FKLA. The annual rate will never be less than 3%.
Accumulation Unit Value. Each Subaccount has a distinct Accumulation Unit
Value. When net premiums or other amounts are allocated to a Subaccount, a
number of units are purchased based on the Accumulation Unit Value of the
Subaccount 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, the Accumulation Unit Value was initially set at
$1.00. The Accumulation Unit Value for each subsequent Valuation Period is the
Investment Experience Factor for that Valuation Period multiplied by the
Accumulation Unit Value for the immediately preceding 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 as a result of
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 distinct 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 investment held in the Subaccount division, 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 to have resulted from the investment
operations of the Subaccount;
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<PAGE> 18
(2) is the net asset value per share of the investment held in the
Subaccount, determined at the end of the last prior 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 Trade Date of the Policy, the Owner may by written request to
FKLA borrow all or part of the maximum loan amount of the Policy. The maximum
loan amount is 95% of the Policy's Cash Value minus applicable surrender
charges, subject to the requirements of the Internal Revenue Code. The amount of
any new loan may not exceed the maximum loan amount less Debt on the date a loan
is granted. The minimum amount of a loan is $500. Any amount due an Owner under
a Policy Loan ordinarily will be paid within 7 days after FKLA receives a loan
request at its Home Office, although payments may be postponed under certain
circumstances. (See "Postponement of Payments," and "Federal Tax Matters.")
On the date a Policy loan is made, an amount equal to the loan amount will
be transferred from the Separate Account and Fixed Account to the Loan Account.
Unless the Owner directs otherwise, the loaned amount will be deducted from the
Subaccounts and the Fixed Account in proportion to the values that each bears to
the Separate Account Value of the Policy in all of the Subaccounts plus the
Fixed Account Value at the end of the Valuation Period during which the request
is received.
The loan interest will be assessed at an effective annual rate of 5.00%.
Interest not paid when due will be added to the loan amount due upon the earlier
of the next Policy Date Anniversary or when coverage ceases upon lapse,
surrender, death or maturity and bear interest at the same rate. When interest
is added to the loan amount, a transfer in this amount will be made from the
Separate Account and the Fixed Account to the Loan Account.
Cash Value in the Loan Account will earn 3.00% annual interest for the
first nine Policy Years and 5% annual interest thereafter. Such earnings will be
allocated to the Loan Account.
Loan Repayment. While the Policy is in force, policy loans may be repaid
at any time, in whole or in part. At the time of repayment, Cash Value in the
Loan Account equal to the amount of the repayment which exceeds the difference
between interest due and interest earned will be allocated to the Subaccounts
and the Fixed Account according to the Owner's current allocation instructions,
unless otherwise requested by the Owner. Transfers from the Loan Account to the
Separate Account or the Fixed Account as a result of the repayment of Debt will
be allocated at the end of the Valuation Period during which the repayment is
received. Such transfers will not be counted in determining the transfers made
within a 15 day period.
Effects of Policy Loan. Policy loans decrease Surrender Value and,
therefore, the amount available to pay the charges necessary to keep the Policy
in force. If Surrender Value on the day immediately preceding a Monthly
Processing Date is less than the monthly deductions for the next month, FKLA
will notify the Owner. (See "General Provisions--Written Notices and Requests.")
The Policy will lapse and terminate without value, unless a sufficient payment
is made to FKLA within 61 days of the date such notice is sent to the Owner.
(See "The Policy--Policy Lapse and Reinstatement.")
Effect on Investment Experience. A Policy Loan will have an effect on the
Cash Value of a Policy. The collateral for the loan (the amount held in the Loan
Account) does not participate in the experience of the Subaccounts or the
current interest rate of the Fixed Account while the loan is outstanding. If the
amount 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 treated as a modified endowment contract, a
loan will be taxed in the same way as a loan from an annuity. Therefore, a loan
may be subject to Federal income tax and a 10% tax penalty may apply. (See
"Federal Tax Matters.")
SURRENDER PRIVILEGE
While the Insured is living and the Policy is in force, the Owner may
surrender the Policy for its Surrender Value. To surrender the Policy, the Owner
must make written request to FKLA at its Home Office and return the Policy to
FKLA. The Surrender Value is equal to the Cash Value less any applicable
Surrender Charge and any Debt. (See "Surrender Charge," below.)
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Surrender Charge. A contingent deferred sales charge ("Surrender Charge")
is imposed to cover expenses relating to the sale of the Policy including
commissions paid to sales personnel, and other promotion and acquisition
expenses. If this Policy is surrendered or if the Cash Value is applied under a
Settlement Option (see "General Provisions--Settlement Options"), the amount
payable may reflect a deduction for applicable Surrender Charges. A Surrender
Charge will not be assessed against Cash Values applied under a settlement
option if the Policy has been in force for five or more years and the settlement
option elected provides for benefit payments of at least five years. The amount
of the Surrender Charge will be calculated as a percentage of the total premiums
paid under the Policy. During the period from the Policy Date to the fifth
Policy Anniversary, the rate is 6%; on the fifth Policy Anniversary, the rate
decreases to 5%, and on each of the next three Policy Anniversaries it will
decrease an additional 1% with a final decrease of 2% on the ninth Policy
Anniversary. Thus, there will be no Surrender Charge beginning on the ninth
Policy Anniversary. The Surrender Charge in any Policy Year will never exceed
$60 per $1,000 of initial Death Benefit.
The applicable Surrender Charge will be determined based upon the date of
receipt of the written request for surrender.
Partial Withdrawals. After the Trade Date, a Policy Owner may make
withdrawals of amounts less than the Surrender Value. The minimum amount of each
withdrawal is $500. Surrender charges will apply to partial withdrawals, but
only to the extent the withdrawal (plus all previous withdrawals made under the
Policy) exceeds Cash Value less total premiums paid into the Policy. For
purposes of determining the surrender charge assessed against a partial
withdrawal, amounts in excess of the total premiums paid under the Policy will
be considered to have been withdrawn first. A $25 withdrawal charge will be
imposed for processing each withdrawal. (See "Charges and Deductions.") A
withdrawal will decrease the Cash Value by the amount of the withdrawal and, if
Death Benefit Option A is in effect, will reduce the Specified Amount by the
amount of the withdrawal (before the withdrawal charge and any applicable
surrender charge.)
FREE-LOOK PERIOD
The Owner may, until the end of the period of time specified in the Policy,
examine the Policy and return it for a refund. The applicable period of time
will depend on the state in which the Policy is issued; however, it will be at
least 10 days from the date the Policy is received by the Owner. The amount of
the refund will be the sum of the Cash Value in the Money Market Subaccount plus
the total amount of monthly deductions and deductions made against Premiums. An
Owner seeking a refund should return the Policy to FKLA at its Home Office or to
the agent who sold the Policy.
CHARGES AND DEDUCTIONS
DEDUCTIONS FROM PREMIUMS
A state and local premium tax charge of 2.5% is deducted from each premium
payment under the Policy prior to allocation of the net premium. This charge is
to reimburse FKLA for the payment of state premium taxes. FKLA expects to pay an
average state premium tax rate of approximately 2.5% but the actual premium tax
attributable to a Policy may be more or less. In addition, a charge for federal
taxes equal to 1% of each premium payment will be deducted to compensate FKLA
for a higher corporate income tax liability resulting from changes made to the
Internal Revenue Code by the Omnibus Budget Reconciliation Act of 1990.
COST OF INSURANCE CHARGE
A monthly deduction is made from the Subaccounts and the Fixed Account for
the cost of insurance to cover FKLA's anticipated mortality costs. The cost of
insurance charge is deducted monthly in advance and is allocated among the
Subaccounts and the Fixed Account in proportion each bears to the Cash Value of
the Policy less Debt.
The cost of insurance will be deducted on the Policy Date and on each
Monthly Processing Date thereafter by the cancellation of units. If the Monthly
Processing Date falls on a day other than a Valuation Date, the charge will be
determined on the next Valuation Date. The cost of insurance charge is
determined by multiplying the applicable cost of insurance rate (see below) by
the "net amount at risk" for each policy month. The net amount at risk is equal
to the Death Benefit minus the Cash Value on the Monthly Processing Date.
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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. The monthly cost
of insurance rates will be determined by FKLA based on its expectations as to
future mortality experience. Any change in the schedule of rates will apply 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 Last Birthday, published by the National Association of Insurance
Commissioners.
Rate Class. The rate class of an Insured will affect the cost of insurance
rate. FKLA currently places 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
A daily charge is deducted from the Subaccounts of the Separate Account for
mortality and expense risks assumed by FKLA. This charge will be at an annual
rate of 0.60%. This charge may be increased in the future but in no event will
it exceed an annual rate of 0.90%. FKLA may profit from this charge.
The mortality and expense risk assumed is that FKLA's estimates of
longevity and of the expenses incurred over the lengthy period the Policy may be
in effect--which estimates are the basis for the level of other charges FKLA
makes under the Policy--will not be correct.
MONTHLY ADMINISTRATIVE CHARGE
FKLA deducts a monthly administrative expense charge to reimburse it 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 FKLA for certain actual administrative expenses. FKLA does not expect
to recover from this charge any amount in excess of aggregate maintenance
expenses. Currently, this charge is $5 per month.
OTHER CHARGES
Surrender Charge. During the first nine Policy Years, if the Policy is
surrendered or if the Cash Value is applied under a Settlement Option, a
Surrender Charge is imposed against the total premium paid. In addition, the
Surrender Charge may apply against a partial withdrawal if the withdrawal (plus
all prior partial withdrawals) exceeds Cash Value less total premiums paid. The
charge decreases from 6% to 0%, depending on the Policy Year of the date of
surrender or application under a Settlement Option. However, a Surrender Charge
will not be assessed against Cash Values applied under a Settlement Option if
the Policy has been in force for five or more years and the Settlement Option
elected provides for the payment of benefits for at least five years. The
Surrender Charges are intended to compensate FKLA for expenses in connection
with the distribution of the Policy. Under current assumptions FKLA anticipates
Surrender Charges will not fully cover distribution expenses. To the extent that
distribution expenses are not recovered from Surrender Charges, those expenses
may be recovered from other sources, including the cost of insurance and the
mortality and expense risk charges described above. Surrender Charges are
described in more detail under "Policy Benefits--Surrender Privilege."
Withdrawal Charge. A charge of $25 will be imposed for each partial
withdrawal. This charge is designed to reimburse FKLA for the administrative
expenses related to the withdrawal. FKLA does not expect to recover any amount
in excess of aggregate expenses. A Surrender Charge may also apply to a partial
withdrawal. (See "Surrender Charge" above.)
Taxes. Currently, no charges are made against the Separate Account for
Federal, state or other taxes that may be attributable to the Separate Account.
FKLA may, however, in the future impose charges for Federal income taxes
attributable to the Separate Account. Charges for other taxes, if any,
attributable to the Policy may also be made. (See "Federal Tax Matters.")
Charges Against the Fund. Under the investment advisory agreement between
the Fund, on behalf of the Portfolios, and the Adviser, the Adviser provides
investment advisory services for the Portfolios. The Fund is responsible for the
advisory fee and all its other expenses. The investment advisory fee differs
with respect to each of the Portfolios of the Fund and is described on page 6 of
this Prospectus. For more information concerning the investment advisory fee and
other charges against the Portfolios of the Fund, see the prospectus for the
Fund and the Statement of Additional Information available upon request.
Systematic Withdrawal Plan. A charge of $50 is imposed to enter into a
Systematic Withdrawal Plan (SWP.) In addition, a $25 charge will be imposed each
time a change is made to the SWP. These charges
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are to reimburse FKLA for expenses related to the administration of the SWP.
(See "Systematic Withdrawal Plan.")
Reduction of Charges. FKLA may reduce certain charges and the minimum
initial premium in special circumstances that result in lower sales,
administrative, or mortality expenses. For example, special circumstances may
exist in connection with group or sponsored arrangements, sales to FKLA
policyowners, or sales to employees or clients of members of the Kemper group of
companies. The amounts of any reductions will reflect the reduced sales effort
and administrative costs resulting from, or the different mortality experience
expected as a result of, the special circumstances. Reductions will not be
unfairly discriminatory against any person, including the affected Owners and
owners of all other policies funded by the Separate Account.
GENERAL PROVISIONS
SETTLEMENT OPTIONS
The Owner, or Beneficiary at the death of the Insured if no election by the
Owner is in effect, may elect to have all of the Death Benefit or Surrender
Value of this Policy 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. Payment will be made as elected by the payee on a monthly,
quarterly, semi-annual or annual basis. The option selected must result in a
payment that is at least equal to FKLA's required minimum, according to rules in
effect at the time the option is chosen. If at any time the payments are less
than the minimum payment, FKLA may increase the period between payments to
quarterly, semi-annual or annual so that the payment is at least equal to our
minimum payment or make the payment in one lump sum.
The Cash Value on the day immediately preceding the date on which the first
benefit payment is due will first be reduced by any applicable Surrender Charge
and Debt. The Surrender Value will be used to determine the benefit payment. The
payment will be based on the settlement option elected in accordance with the
appropriate settlement option table.
Option 1--Income For Specified Period. FKLA will pay income for the period
and payment mode elected but not less than 5 years nor more than 30 years.
Option 2--Life Income. FKLA will pay a 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 annuitant without regard to
the number or total amount of payments made. Thus, it is possible for an
individual to receive only one payment if death occurred prior to the date the
second payment was due.
Option 3--Life Income with Installments Guaranteed. FKLA will pay a monthly
income for the guaranteed period elected and thereafter for the remaining
lifetime of the payee. The period elected may only be 5, 10, 15 or 20 years.
Option 4--Joint and Survivor Annuity. FKLA will pay the full monthly income
while both payees are living. Upon the death of either payee, the income will
continue during the lifetime of the surviving payee. The surviving payee's
income shall be the percentage of such full amount chosen at the time of
election of this option. The percentages available are 50%, 66 2/3%, 75% and
100%. Annuity payments terminate automatically and immediately upon the death of
the surviving payee without regard to the number or total amount of payments
received.
FKLA's consent is necessary for any other payment methods.
The guaranteed monthly payments are based on an interest rate of 2.50% per
year and, where mortality is involved, the "1983 Table a" individual mortality
table developed by the Society of Actuaries, with a 5 year setback.
POSTPONEMENT OF PAYMENTS
General. Payment of any amount due upon: (a) Policy termination at the
Maturity Date, (b) surrender of the Policy, (c) payment of any Policy loan, or
(d) death of the Insured, may be postponed whenever:
(1) The New York Stock Exchange is closed other than customary weekend
and holiday closings, or trading on the New York Stock Exchange is
restricted as determined by the SEC;
(2) The SEC by order permits postponement for the protection of
Owners; or
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(3) An emergency exists, as determined by the SEC, as a result of
which disposal of securities of the Fund is not reasonably practicable or
it is not reasonably practicable to determine the value of the net assets
of the Separate Account.
Transfers may also be postponed under these circumstances.
Payment Not Honored by Bank. The portion of any payment due under the
Policy which is derived from any amount paid to FKLA by check or draft may be
postponed until such time as FKLA determines 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 FKLA and the Owner. All statements made by the Insured or
contained in the application will, in the absence of fraud or misrepresentation,
be deemed representations and not warranties.
Only the President, the Secretary, or an Assistant Secretary of FKLA 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
changed to what the cost of insurance on the previous Monthly Processing Date
would have purchased based on the correct sex and age.
INCONTESTABILITY
FKLA 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 of the Policy is a risk not assumed under the Policy. FKLA's
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 assignment of a Policy is binding on FKLA until it is received by FKLA
at its Home Office. FKLA assumes no responsibility for the validity of the
assignment. Any claim under an assignment is subject to proof of the extent of
the interest of the assignee. If this Policy is assigned, the rights of the
Owner and Beneficiary are subject to the rights of the assignee of record.
NONPARTICIPATING
This Policy will not pay dividends. It will not participate in any of
FKLA's surplus or earnings.
OWNER AND BENEFICIARY
The Owner may, at any time during the life of the Insured and while the
Policy is in force, designate a new Owner.
Primary and secondary Beneficiaries may be designated by the Owner in the
application. If changed, the primary or secondary Beneficiary is as shown in the
latest change filed with FKLA. If no Beneficiary survives the Insured, the
Insured's estate will be the Beneficiary. The interest of any Beneficiary may be
subject to that of an assignee.
Any change of Owner or Beneficiary must be made in writing in a form
acceptable to FKLA. The change will take effect as of the date the request is
signed. FKLA will not be liable for any payment made or other action taken
before the notice has been received at FKLA's Home Office.
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RECORDS AND REPORTS
FKLA will maintain all records relating to the Separate Account. FKLA will
send Owners, at their last known address of record, an annual report stating the
Death Benefit, the Accumulation Unit Value, the Cash Value and Surrender Value
under the Policy, and indicating any additional premium payments, partial
withdrawals, transfers, Policy loans and repayments and charges made during the
Policy Year. In addition, Owners will be sent confirmations and acknowledgments
of various transactions. Owners will also be sent annual and semi-annual reports
for the Fund to the extent required by the 1940 Act.
WRITTEN NOTICES AND REQUESTS
Any written notice or request to be sent to FKLA should be sent to its Home
Office, 1 Kemper Drive, Long Grove, Illinois 60049. The notice or request should
include the Policy number and the Insured's full name. Any notice sent by FKLA
to an Owner will be sent to the address shown in the application unless an
address change has been filed with FKLA.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, a Policy Owner may elect to add one or
more of the following optional insurance benefits to the Policy by a Rider at
the time of application for a Policy. These optional benefits are: waiver of all
monthly deductions against the Policy in the event of total disability of the
Insured, term insurance on the Insured's dependent children, acceleration of the
payment of a portion of the death benefit when the Insured is terminally ill,
and term insurance on an additional insured specified by the Owner. The cost of
any additional insurance benefits will be deducted as part of the monthly
deductions. Certain restrictions may apply. Restrictions and provisions related
to these benefits are more fully described in the applicable rider. Samples of
the provisions are available from FKLA upon written request.
DOLLAR COST AVERAGING
A Policy Owner may predesignate a portion of the Cash Value under a Policy
attributable to the Money Market or Government Securities Subaccount to be
automatically transferred on a monthly basis to one or more of the other
Subaccounts and the Fixed Account. A Policy Owner may enroll in this program at
the time the Policy is issued or anytime thereafter by properly completing the
Dollar Cost Averaging enrollment form and returning it to FKLA at its home
office at least five (5) business days prior to the 10th day of a month which is
the date that all Dollar Cost Averaging transfers will be made ("Transfer
Date").
Transfers will commence on the first Transfer Date following the Trade
Date. Transfers will be made in the amounts designated by the Policy Owner and
must be at least $500 per Subaccount. The total Cash Value in the Money Market
or Government Securities Subaccount at the time Dollar Cost Averaging is elected
must be at least equal to the greater of $10,000 or the amount designated to be
transferred on each Transfer Date multiplied by the duration selected. Dollar
Cost Averaging will cease automatically if the Cash Value does not equal or
exceed the amount designated to be transferred on each Transfer Date and the
remaining amount will be transferred.
Dollar Cost Averaging will terminate when (i) the number of designated
monthly transfers has been completed, (ii) the Cash Value attributable to the
Money Market or Government Securities Subaccount is insufficient to complete the
next transfer, (iii) the Policy Owner requests termination in writing and such
writing is received by FKLA at its home office at least five business days prior
to the next Transfer Date in order to cancel the transfer scheduled to take
effect on such date, or (iv) the Policy is surrendered. FKLA reserves the right
to amend Dollar Cost Averaging on thirty days notice or terminate it at any
time.
A Policy Owner may initiate, reinstate or change Dollar Cost Averaging or
change existing Dollar Cost Averaging terms by properly completing the new
enrollment form and returning it to FKLA at its home office at least five (5)
business days, ten (10) business days for Fixed Account transfers, prior to the
next Transfer Date such transfer is to be made.
When utilizing Dollar Cost Averaging, a Policy Owner must be invested in
the Money Market or Government Securities Subaccount and may be invested in the
Fixed Account and a maximum of eight other Subaccounts at any given time.
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SYSTEMATIC WITHDRAWAL PLAN
FKLA administers a Systematic Withdrawal Plan ("SWP") which allows certain
Policy Owners to preauthorize periodic withdrawals. Policy Owners entering into
a SWP agreement instruct FKLA to withdraw selected amounts from the Fixed
Account, or from a maximum of two Subaccounts on a monthly, quarterly,
semi-annual or annual basis. Currently the SWP is available to Policy Owners who
request a minimum $500 periodic payment. The amounts distributed under the SWP
are partial withdrawals and will be subject to surrender charges, if applicable.
(See "Policy Benefits and Rights--Surrender Privileges.") The $25 withdrawal
charge does not apply. However, a charge of $50 will be imposed at the time a
SWP is established. In addition, a $25 charge will be imposed each time a change
is made to the SWP. These charges are designed to reimburse FKLA for expenses
related to the administration of the SWP. Withdrawals taken under the SWP may be
subject to income taxes, withholding and tax penalties. See "Federal Tax
Matters." Policy Owners interested in the SWP may obtain an application and full
information concerning this program and its restrictions from their
representative or FKLA's home office. The right is reserved to amend the SWP on
thirty days' notice. The SWP may be terminated at any time by the Contract Owner
or FKLA.
DISTRIBUTION OF POLICIES
The Policy is sold by licensed insurance representatives who represent FKLA
and who are registered representatives of broker-dealers which are registered
under the Securities Exchange Act of 1934 and are members of the National
Association of Securities Dealers, Inc. The Policy is distributed through the
principal underwriter, Investors Brokerage Services, Inc. ("IBS"), an affiliate
of FKLA.
Gross commissions paid by FKLA on the sale of the Policy plus fees for
marketing services provided by affiliates of FKLA are not more than 10% in the
first year and 6% in renewal years. A service fee at an annual rate of 0.10% on
assets which have been maintained and serviced may also be paid. Firms to which
service fees and commissions may be paid include affiliated broker-dealers.
IBS is engaged in the sale and distribution of other variable life policies
and annuities.
FEDERAL TAX MATTERS
The ultimate effect of Federal income taxes on the Policy, on settlement
options and on the economic benefit to the Owner, Beneficiary or payee depends
on FKLA's tax status, and upon the tax status of the individual concerned.
FKLA'S TAX STATUS
Under current interpretations of Federal income tax law, FKLA is taxed as a
life insurance company and the operations of the Separate Account are treated as
part of the total operations of FKLA. The operations of the Separate Account do
not materially affect FKLA's Federal income tax liability because FKLA is
allowed a deduction to the extent that net investment income of the Separate
Account is applied to increase Owners' equity. FKLA may incur state and local
taxes attributable to the Separate Account. At present, these taxes are not
significant. Accordingly, FKLA does not charge or credit the Separate Account
for Federal, state or local taxes. Thus, the Separate Account may realize net
investment income, such as interest, dividends or capital gains, and reinvest
such income all without tax consequences to the Separate Account.
If there is a material change in applicable Federal, state or local law,
however, charges or credits may be made to the Separate Account for Federal,
state or local taxes, or reserves for such taxes, if any, attributable to the
Separate Account. Such charges or credits will be determined independent of the
taxes actually paid by FKLA.
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code ("Code") provides that if certain
tests are met, a Policy will be treated as a life insurance policy for federal
tax purposes. FKLA will monitor compliance with these tests. The Policy should
thus receive the same federal income tax treatment as fixed benefit life
insurance. As a result, the death benefit payable under a Policy is excludable
from gross income of the beneficiary under Section 101 of the Code.
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Section 7702A of the Code defines modified endowment contracts as those
policies issued or materially changed on or after June 21, 1988 on which the
total premiums paid during the first seven years exceed the amount that would
have been paid if the policy provided for paid up benefits after seven level
annual premiums. The Code provides for taxation of surrenders, partial
surrenders, loans, collateral assignments and other pre-death distributions from
modified endowment contracts in the same way annuities are taxed. Modified
endowment contract distributions are defined by the Code as amounts not received
as an annuity and are taxable to the extent the cash value of the policy
exceeds, at the time of distribution, the premiums paid into the policy. A 10%
tax penalty also applies to the taxable portion of such distributions unless the
Policy Owner is over age 59 1/2 or disabled, or if other exceptions apply.
It may not be advantageous to replace existing insurance with Policies
described in this prospectus. It may also be disadvantageous to purchase a
policy to obtain additional insurance protection if the purchaser already owns
another variable life insurance policy.
The Policies offered by this prospectus may or may not be issued as
modified endowment contracts. FKLA will monitor premiums paid and will notify
the Policy Owner when the Policy's non-modified endowment status is in jeopardy.
If a policy is not a modified endowment contract, a cash distribution during the
first 15 years after a policy is issued which causes a reduction in death
benefits may still become fully or partially taxable to the Owner pursuant to
Section 7702(f)(7) of the Code. The Policy Owner should carefully consider this
potential effect and seek further information before initiating any changes in
the terms of the Policy. Under certain conditions, a Policy may become a
modified endowment as a result of a material change or a reduction in benefits
as defined by Section 7702A(c) of the Code.
In addition to meeting the tests required under Section 7702 and Section
7702A, Section 817(h) of the Code requires that the investments of separate
accounts such as the FKLA Variable Separate Account be adequately diversified.
Regulations issued by the Secretary of the Treasury, set the standards for
measuring the adequacy of this diversification. A variable life policy that is
not adequately diversified under these regulations would not be treated as life
insurance under Section 7702 of the Code. To be adequately diversified, each
Subaccount of the Separate Account must meet certain tests. FKLA believes that
the investments of the Separate Account meet the applicable diversification
standards.
Should the Secretary of the Treasury issue additional rules or regulations
limiting the number of funds, transfers between funds, exchanges of funds or
changes in investment objectives of funds such that the Policy would no longer
qualify as life insurance under Section 7702 of the Code, FKLA will take
whatever steps are available to remain in compliance.
FKLA will monitor compliance with these regulations and, to the extent
necessary, will change the objectives or assets of the sub-account investments
to remain in compliance.
A total surrender or cancellation of the Policy by lapse may have adverse
tax consequences depending on the circumstances.
Federal estate and state and local estate, inheritance and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Policy Owner or Beneficiary.
OTHER CONSIDERATIONS
Because of the complexity of the law in its application to a specific
individual, tax advice may be needed by a person contemplating purchase of a
Policy or the exercise of elections under a Policy. The above comments
concerning the Federal income tax consequences are not exhaustive and are not
intended as tax advice. Counsel and other competent advisers should be consulted
for more complete information. This discussion is based on FKLA's understanding
of Federal income tax laws as they are currently interpreted by the Internal
Revenue Service. No representation is made as to the likelihood of continuation
of these current laws and interpretations. FKLA also believes the Policy meets
other requirements concerning Owner control over investments. However, the
Secretary of Treasury has not issued regulations on this subject. Such
regulations, if adopted, could include requirements not included in the Policy.
We believe that such regulations if adopted would apply prospectively but do not
so guarantee. If possible, FKLA will make modifications to the Policy to comply
with such regulations.
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 described in this Prospectus contains cost of insurance rates that
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<PAGE> 26
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 this Policy.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
FKLA holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of FKLA. FKLA
maintains records of all purchases and redemptions of the shares of each
portfolio of the Fund by each of the Subaccounts.
VOTING INTERESTS
To the extent required by law, FKLA will 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. If, however, the 1940 Act
or any regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result FKLA determines that it is permitted to
vote a Fund's shares in its own right, it may elect to do so.
Owners of all Policies participating in each Subaccount shall have voting
interests with respect to that Subaccount, based upon each Owner's proportionate
interest in that Subaccount as measured by units.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio of
the Fund.
FKLA will vote shares of the Fund for which it has not received timely
instructions in proportion to the voting instructions that FKLA has received
with respect to all variable policies participating in a portfolio. FKLA will
also vote any Fund shares attributed to amounts it has accumulated in the
Subaccounts in the same proportions that Owners vote.
FKLA may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as to cause a change in the subclassification or investment objective
of the Fund or of one or more of its portfolios or to approve or disapprove an
investment advisory contract for a Portfolio of the Fund. In addition, FKLA
itself may disregard voting instructions in favor of changes initiated by an
Owner in the investment policy or the investment adviser of a Portfolio of a
Fund if FKLA reasonably disapproves 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 FKLA determines that the change would have an
adverse effect on its General Account in that the proposed investment policy for
a Portfolio may result in overly speculative or unsound investments. In the
event FKLA does disregard voting instructions, a summary of that action and the
reasons for such action will be included in the next annual report to Owners.
STATE REGULATION OF FKLA
FKLA, a stock life insurance company organized under the laws of Illinois,
is subject to regulation by the Illinois Department of Insurance. An annual
statement is filed with the Director of Insurance on or before March 1st of each
year covering the operations and reporting on the financial condition of FKLA as
of December 31st of the preceding year. Periodically, the Director of Insurance
examines the liabilities and reserves of FKLA and the Separate Account and
certifies to their adequacy, and a full examination of FKLA's operations is
conducted by the National Association of Insurance Commissioners at least once
every three years.
In addition, FKLA is subject to the insurance laws and regulations of other
states within which it is licensed to operate. Generally, the insurance
department of any other state applies the laws of the state of domicile in
determining permissible investments.
21
<PAGE> 27
DIRECTORS AND OFFICERS OF FKLA
The directors and principal officers of FKLA 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>
POSITION WITH FKLA OTHER BUSINESS EXPERIENCE DURING
NAME AND AGE YEAR OF ELECTION PAST 5 YEARS OR MORE
----------------------------- ----------------------- -------------------------------------
<S> <C> <C>
John B. Scott (50)........... Chairman of the Board, Executive Vice President of Kemper
Director, Chief Corporation from January 1994, Direc-
Executive Officer tor, Chairman of the Board, and Chief
and President 1988 Executive Officer of Kemper Investors
Life Insurance Company since 1992 and
Fidelity Life Association since 1988.
Executive Vice President of Kemper
Financial Companies, Inc. since
January 1994 and Director since 1992.
John H. Fitzpatrick (37)..... Vice President 1993 and Executive Vice President and Chief
Director 1990 Financial Officer of Kemper Corpora-
tion since May 1993; prior thereto,
Senior Vice President and Chief
Financial Officer until May 1993 from
May 1990; prior thereto, Vice
President of Kemper Corporation; also
Executive Vice President and Chief
Financial Officer of Kemper Financial
Companies, Inc. since January 1994,
Vice President and Director of Kemper
Investors Life Insurance Company
since 1992.
James R. Boris (49).......... Director 1994 Executive Vice President of Kemper
Corporation from January 1994. Direc-
tor of Kemper Investors Life
Insurance Company since January 1993.
Executive Vice President of Kemper
Financial Companies, Inc. since March
1990. Chairman of the Board and Chief
Executive Officer of both Kemper
Securities Holdings, Inc. and Kemper
Securities, Inc. since August 1990.
Chairman of the Board and Chief
Executive Officer of INVEST Financial
Corporation from May 1989 to July
1991.
</TABLE>
22
<PAGE> 28
<TABLE>
<CAPTION>
POSITION WITH FKLA OTHER BUSINESS EXPERIENCE DURING
NAME AND AGE YEAR OF ELECTION PAST 5 YEARS OR MORE
----------------------------- ----------------------- -------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
David B. Mathis (56)......... Director 1990 Chairman of the Board and Chief
Executive Officer of Kemper
Corporation from February 1992; prior
thereto, President from May 1990 to
September 1992, Chief Operating
Officer from May 1990 to February
1992; prior thereto, Executive Vice
President from May 1989 of Kemper
Corporation. Chairman of the Board
and Chief Executive Officer of Kemper
Reinsurance Company until March 1990;
Vice President of Lumbermens Mutual
Casualty Company until May 1989.
Stephen B. Timbers (50)...... Director 1992 President and Chief Operating Officer
of Kemper Corporation since September
1992; Chief Executive Officer and
Chief Investment Officer of Kemper
Financial Services, Inc. since 1995;
prior thereto, Chief Investment
Officer until May 1993 from May 1991
of Kemper Corporation; also Senior
Executive Vice President from March
1990; prior thereto, Chief Invest-
ment Officer until May 1993 from May
1990; prior thereto, Executive Vice
President and Chief Investment
Officer of Kemper Financial Services,
Inc.
Debra P. Rezabek (38)........ General Counsel, Direc- General Counsel, Director of Govern-
tor of Government ment Affairs of Kemper Investors Life
Affairs of and Insurance Company and Fidelity Life
Assistant Secretary Association since 1992, prior thereto
1992 Assistant General Counsel from
September 1988, Federal Kemper Life
Assurance Company and Fidelity Life
Association.
Jerome J. Cwiok (47)......... Senior Vice President Senior Vice President of Kemper
1993 Investors Life Insurance Company from
November 1993; prior thereto, Vice
President of Federal Kemper Life
Assurance Company and Fidelity Life
Association from March 1993 to
November 1993. Executive Vice
President from 1986-1993 of Academy
Insurance Group, Atlanta, Georgia.
Eliane C. Frye (46).......... Senior Vice President Senior Vice President of Kemper
1993 Investors Life Insurance Company
since 1993; prior thereto Vice
President of Federal Kemper Life
Assurance Company and Fidelity Life
Association since 1988.
</TABLE>
LEGAL MATTERS
All matters of Illinois law pertaining to the Policy, including the
validity of the Policy and FKLA's right to issue the Policy under Illinois
Insurance Law, have been passed upon by Frank J. Julian, Assistant General
Counsel of FKLA. Katten Muchin & Zavis, Washington, D.C., has advised FKLA on
certain legal matters concerning federal securities laws applicable to the issue
and sale of Policies.
23
<PAGE> 29
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. FKLA is not a party in
any litigation that is of material importance in relation to its total assets or
that relates to the Separate Account.
EXPERTS
The statutory financial statements of FKLA have been included in the
Prospectus in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. As discussed in the notes to
FKLA's statutory financial statements, effective January 1, 1993, FKLA changed
its method of accounting for impairment of loans receivable to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of
a Loan.
Actuarial matters included in this prospectus have been examined by Steven
Powell, FSA as stated in the opinion filed as an exhibit to the Registration
Statement.
FKLA prepares its statutory financial statements in conformity with
accounting practices prescribed or permitted by the Illinois Insurance
Department. When statutory financial statements are presented for purposes other
than for filing with a regulatory agency, generally accepted auditing standards
require that an auditor's report on them state whether they are presented in
conformity with generally accepted accounting principles. The accounting
practices used by FKLA vary from generally accepted accounting principles as
explained in note 1 to FKLA's statutory financial statements and FKLA has not
determined the effects of these variances. Accordingly, KPMG Peat Marwick LLP
was not engaged to audit, and did not audit, the effects of these variances.
Since the statutory financial statements do not purport to be a presentation in
conformity with generally accepted accounting principles, KPMG Peat Marwick LLP
is not in a position to express and does not express an opinion on the statutory
financial statements as to the fair presentation of financial position, results
of operations, or cash flows in conformity with generally accepted accounting
principles.
REGISTRATION STATEMENT
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Policies. For further information concerning the Separate Account, FKLA and the
Policy, reference is made to the Registration Statement as amended with
exhibits. Copies of the Registration Statement are available from the Commission
upon payment of a fee.
FINANCIAL STATEMENTS
The statutory financial statements of FKLA that are included should be
considered only as bearing upon FKLA's ability to meet its contractual
obligations under the Policy. FKLA's statutory financial statements do not bear
on the investment experience of the assets held in the Separate Account. No
financial statements are included for the Separate Account. It has not yet
commenced operations, has no assets or liabilities and received no income nor
incurred any expense.
24
<PAGE> 30
FEDERAL KEMPER LIFE ASSURANCE COMPANY
UNAUDITED STATUTORY FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
25
<PAGE> 31
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ ------------------------------
1994 1993 1994 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income:
Premiums and annuity considerations $ 219,490,614 $ 235,426,176 $ 72,421,323 $ 76,256,578
Consideration for supplementary
contracts 17,307,757 20,730,296 4,201,312 5,143,769
Investment income 123,645,964 119,687,134 43,674,384 38,966,798
Amortization of interest maintenance
reserve 1,804,579 1,548,719 (3,112) 633,998
Reinsurance ceding commissions and
allowances 19,118,784 17,151,368 6,686,483 5,879,625
Other income (loss) 16,925 10,741 (4,293) (54)
------------- ------------- ------------- -------------
Total income 381,384,623 394,554,434 126,976,097 126,880,714
------------- ------------- ------------- -------------
Benefits and expenses:
Death and other benefits 268,769,307 232,353,978 90,653,421 76,598,370
Increase (decrease) in aggregate
reserves for policies and other
contracts (42,455,007) 27,523,403 (15,181,941) 5,476,239
Commissions 42,695,423 40,940,840 15,019,539 12,463,051
General expenses 21,055,079 20,108,872 6,890,337 7,360,338
Insurance taxes, licenses and fees 8,486,810 9,356,074 3,838,231 4,115,031
------------- ------------- ------------- -------------
Total benefits and expenses 298,551,612 330,283,167 101,219,587 106,013,029
------------- ------------- ------------- -------------
Gain from operations before dividends
to policyholders and Federal income
tax expense 82,833,011 64,271,267 25,756,510 20,867,685
Dividends to policyholders 50,416 54,915 13,895 16,684
------------- ------------- ------------- -------------
Gain from operations before Federal
income tax expense 82,782,595 64,216,352 25,742,615 20,851,001
Federal income tax expense 29,269,538 27,393,246 8,239,978 12,140,313
------------- ------------- ------------- -------------
Net operating gain 53,513,057 36,823,106 17,502,637 8,710,688
Realized capital gains (losses):
Net realized gains (losses) (29,705,566) 7,352,262 (23,331,512) (1,465,063)
Related Federal income tax benefit
(expense) 6,931,825 (3,412,000) 941,283 1,397,555
Net losses (gains) transferred to
the interest maintenance reserve 23,102,998 (16,085,201) 22,920,341 (2,914,161)
------------- ------------- ------------- -------------
Total realized capital gains (losses) 329,257 (12,144,939) 530,112 (2,981,669)
------------- ------------- ------------- -------------
Net income $ 53,842,314 $ 24,678,167 $ 18,032,749 $ 5,729,019
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to statutory financial statements.
26
<PAGE> 32
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
Cash provided (used):
From operations:
Premiums and considerations $ 234,503,406 $ 250,443,625
Investment income received 125,881,617 125,506,343
Other income received 18,784,173 17,578,416
Benefits paid (269,851,392) (231,348,874)
Commissions, other expenses, and taxes paid (66,500,182) (69,869,599)
Federal income taxes paid (46,065,000) (27,114,773)
Increase in policy loans (3,699,769) (3,710,578)
-------------- --------------
Net cash provided by (used in) operations (6,947,147 61,484,560
-------------- --------------
Investments sold, matured, or repaid:
Bonds 876,235,052 681,004,310
Stocks 17,554,982 18,520,277
Mortgage loans 74,776,552 80,417,464
Real estate 11,436,489 --
Other invested assets 39,979,348 104,640,062
Net gain on short-term investments -- 3,650,154
-------------- --------------
Investments sold, matured, or repaid 1,019,982,423 888,232,267
-------------- --------------
Other cash provided 281,494,966 44,597,685
-------------- --------------
Total cash provided 1,294,530,242 994,314,512
-------------- --------------
Cash applied:
Cost of investments acquired:
Bonds 980,818,516 847,134,560
Stocks 604,805 4,704,346
Mortgage loans 65,375,092 82,862,526
Other invested assets 25,636,494 39,356,310
-------------- --------------
Total cost of investments acquired 1,072,434,907 974,057,742
-------------- --------------
Other cash applied:
Dividends to stockholder 73,761,914 8,761,914
Other 181,992,828 6,446,038
-------------- --------------
Total other cash applied 255,754,742 15,207,952
-------------- --------------
Total cash applied 1,328,189,649 989,265,694
-------------- --------------
Net change in cash and short-term investments (33,659,407) 5,048,818
Cash and short-term investments:
Beginning of year 160,729,297 87,989,313
-------------- --------------
End of year $ 127,069,890 $ 93,038,131
-------------- --------------
</TABLE>
See accompanying notes to statutory financial statements.
27
<PAGE> 33
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES, AND CAPITAL STOCK AND
SURPLUS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds, principally at amortized cost (market value: 1994,
$1,873,762,038; 1993, $1,934,937,584) $1,930,256,705 $1,857,096,503
Stocks:
Preferred, at cost (market value: 1994, $9,879,211; 1993,
$14,132,550) 9,907,646 13,907,646
Common, at market (cost: 1994, $4,457,628; 1993,
$7,213,869) 7,087,102 17,939,182
Mortgage loans 269,796,985 285,208,538
Real estate 6,306,834 15,963,336
Policy loans 104,470,136 100,770,367
Cash 1,749,017 20,344,427
Other invested assets 61,916,102 83,991,450
Short-term investments 125,320,873 140,384,870
-------------- --------------
Total cash and invested assets 2,516,811,400 2,535,606,319
Premiums deferred and uncollected 74,514,633 73,448,814
Investment income accrued 35,471,788 42,785,161
Receivables from affiliates 20,558,338 11,281,933
Investment receivables 173,070,839 --
Federal income taxes recoverable 21,525,073 --
Other assets and receivables 9,271,087 8,864,187
Separate account assets at market value 363,487,807 384,155,427
-------------- --------------
Total admitted asset $3,214,710,965 $3,056,141,841
-------------- --------------
LIABILITIES AND CAPITAL STOCK AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts $2,124,126,210 $2,169,426,945
Policy and contract claims 30,869,082 31,175,604
Other policyholders' funds 85,742,829 83,266,424
Interest maintenance reserve 2,116,603 27,024,180
Accrued taxes and expenses 8,114,453 13,166,724
Asset valuation reserve 42,539,224 47,811,479
Cost of collection in excess of loading 30,744,134 31,521,730
Real estate valuation reserve 26,287,301 31,802,428
Investment payables 297,429,155 11,966,862
Other liabilities 15,688,873 15,520,903
Separate account liabilities 363,487,807 384,155,427
-------------- --------------
Total liabilities 3,027,145,671 2,846,838,706
-------------- --------------
Capital stock and surplus:
Common stock, $20 par value. Authorized 500,000 shares;
issued 136,351 shares 2,727,020 2,727,020
Paid-in surplus 90,111,297 90,111,297
Unassigned surplus 94,726,977 116,464,818
-------------- --------------
Total capital stock and surplus 187,565,294 209,303,135
-------------- --------------
Total liabilities and capital stock and surplus $3,214,710,965 $3,056,141,841
-------------- --------------
</TABLE>
See accompanying notes to statutory financial statements.
28
<PAGE> 34
FEDERAL KEMPER LIFE ASSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of management, all necessary adjustments consisting of normal
recurring accruals have been made for a fair statement of Federal Kemper
Life Assurance Company's results for the periods included in these
financial statements. These financial statements should be read in
conjunction with the financial statements and related notes in the 1993
Statutory Financial Statements.
2. As a result of the overall rise in general interest rates subsequent to
year-end 1993, the estimated market value of the Company's bond portfolio
has declined significantly during 1994. At December 31, 1994 the Company's
bond portfolio had an aggregate net unrealized loss of approximately $243.8
million.
29
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FEDERAL KEMPER LIFE ASSURANCE COMPANY:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Federal Kemper Life Assurance
Company as of December 31, 1993 and 1992, and the related statutory statements
of operations, capital stock and surplus, and cash flow for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits of the accompanying statutory financial statements
in accordance with generally accepted auditing standards; however, as discussed
in the following paragraph, we were not engaged to determine or audit the
effects of the variances between statutory accounting practices and generally
accepted accounting principles. Generally accepted auditing standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion on the accompanying statutory
financial statements.
The Company prepares its financial statements in conformity with accounting
practices prescribed or permitted by the Illinois Insurance Department. When
statutory financial statements are presented for purposes other than for filing
with a regulatory agency, generally accepted auditing standards require that an
auditor's report on them state whether they are presented in conformity with
generally accepted accounting principles. The accounting practices used by the
Company vary from generally accepted accounting principles as explained in note
1, and the Company has not determined the effects of these variances.
Accordingly, we were not engaged to audit, and we did not audit, the effects of
these variances. Since the financial statements referred to above do not purport
to be a presentation in conformity with generally accepted acounting principles,
we are not in a position to express and do not express an opinion on the
financial statements referred to above as to the fair presentation of financial
position, results of operations, or cash flows in conformity with generally
accepted accounting principles.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities, and capital stock
and surplus of Federal Kemper Life Assurance Company as of December 31, 1993 and
1992, and the results of its operations and its cash flow for the years then
ended, on the basis of accounting described in note 1.
As discussed in the notes to the financial statements, effective January 1,
1993 the Company changed its method of accounting for impairment of loans
receivable to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by
Creditors for Impairment of a Loan.
March 7, 1994, except as to note 11,
which is as of April 15, 1994
30
<PAGE> 36
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Statutory Statements of Admitted Assets, Liabilities, and Capital Stock and
Surplus
December 31, 1993 and 1992
<TABLE>
<CAPTION>
=======================================================================================================
ADMITTED ASSETS 1993 1992
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bonds, principally at amortized cost $1,857,096,503 1,648,059,430
Stocks:
Preferred, at cost 13,907,646 19,342,632
Common, at market 17,939,182 30,508,548
Mortgage loans 285,208,538 349,991,463
Real estate 15,963,336 16,218,755
Policy loans 100,770,367 95,906,519
Cash 20,344,427 7,779,766
Other invested assets 83,991,450 154,661,942
Short-term investments 140,384,870 80,209,547
-------------------------------------------------------------------------------------------------------
Total cash and invested assets 2,535,606,319 2,402,678,602
Premiums deferred and uncollected 73,448,814 72,492,147
Investment income accrued 42,785,161 47,865,872
Receivable from affiliates 11,281,933 5,862,715
Investment receivables - 11,030,421
Other assets and receivables 8,864,187 9,030,982
Separate account assets at market value 384,155,427 374,209,347
-------------------------------------------------------------------------------------------------------
Total admitted assets $3,056,141,841 2,923,170,086
=======================================================================================================
LIABILITIES AND CAPITAL STOCK AND SURPLUS
-------------------------------------------------------------------------------------------------------
Liabilities:
Aggregate reserves for policies and contracts 2,169,426,945 2,134,944,710
Policy and contract claims 31,175,604 29,745,761
Other policyholders' funds 83,266,424 66,321,162
Interest maintenance reserve 27,024,180 9,183,929
Accrued taxes and expenses 13,166,724 10,134,978
Asset valuation reserve 47,811,479 41,651,206
Cost of collection in excess of loading 31,521,730 36,393,464
Real estate valuation reserve 31,802,428 18,589,400
Investment payables 11,966,862 -
Other liabilities 15,520,903 8,819,080
Separate account liabilities 384,155,427 374,209,347
-------------------------------------------------------------------------------------------------------
Total liabilities 2,846,838,706 2,729,993,037
-------------------------------------------------------------------------------------------------------
Capital stock and surplus:
Common stock, $20 par value. Authorized
500,000 shares; issued 136,351 shares 2,727,020 2,727,020
Paid-in surplus 90,111,297 90,111,297
Unassigned surplus 116,464,818 100,338,732
-------------------------------------------------------------------------------------------------------
Total capital stock and surplus 209,303,135 193,177,049
-------------------------------------------------------------------------------------------------------
Total liabilities and capital stock and surplus $3,056,141,841 2,923,170,086
=======================================================================================================
</TABLE>
See accompanying notes to statutory financial statements.
31
<PAGE> 37
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Statutory Statements of Operations
Years Ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
=======================================================================================================
1993 1992
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Premiums and annuity considerations $ 308,149,786 340,107,195
Consideration for supplementary contracts 25,998,291 19,528,941
Investment income (net of expenses of $5,224,244 and
$4,288,698 in 1993 and 1992, respectively) 161,419,695 167,408,283
Amortization of interest maintenance reserve 2,360,875 578,379
Reinsurance ceding commissions and allowances 22,832,164 23,332,549
Other income 12,170 21,922
-------------------------------------------------------------------------------------------------------
Total income 520,772,981 550,977,269
-------------------------------------------------------------------------------------------------------
Benefits and expenses:
Death and other benefits 306,858,370 243,905,993
Increase in aggregate reserves for policies and other contracts 41,312,831 144,336,663
Commissions 53,728,981 63,267,833
General expenses 26,836,092 32,988,617
Insurance taxes, licenses, and fees 11,387,157 10,483,266
-------------------------------------------------------------------------------------------------------
Total benefits and expenses 440,123,431 494,982,372
-------------------------------------------------------------------------------------------------------
Gain from operations before dividends to
policyholders and Federal income tax expense 80,649,550 55,994,897
Dividends to policyholders 83,278 75,313
-------------------------------------------------------------------------------------------------------
Gain from operations before Federal income tax expense 80,566,272 55,919,584
Federal income tax expense 28,560,304 23,133,557
-------------------------------------------------------------------------------------------------------
Net operating gain 52,005,968 32,786,027
Realized capital gains (losses):
Net realized capital gains (losses) 18,791,238 (36,816,549)
Related Federal income tax (expense) benefit (9,399,004) 387,653
Net gain transferred to the interest maintenance reserve (20,201,126) (9,762,308)
-------------------------------------------------------------------------------------------------------
Total realized capital losses (10,808,892) (46,191,204)
-------------------------------------------------------------------------------------------------------
Net income (loss) $ 41,197,076 (13,405,177)
=======================================================================================================
</TABLE>
See accompanying notes to statutory financial statements.
32
<PAGE> 38
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Statutory Statements of Capital Stock and Surplus
Years ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
=======================================================================================================
1993 1992
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capital stock - at beginning and end of year $ 2,727,020 2,727,020
-------------------------------------------------------------------------------------------------------
Paid-in surplus at beginning and end of year 90,111,297 90,111,297
-------------------------------------------------------------------------------------------------------
Unassigned surplus:
Balance at beginning of year 100,338,732 129,500,993
Net income (loss) 41,197,076 (13,405,177)
Unrealized capital gains 9,641,965 43,950,430
Change in non-admitted assets (53,003) 244,940
Cash dividends to Parent (31,682,552) (41,682,552)
Change in asset valuation reserve (6,160,273) (18,726,160)
Prior period tax adjustment (800,000) (3,407,102)
General real estate reserve - 3,863,360
Noncash dividend to Parent 3,982,873 -
-------------------------------------------------------------------------------------------------------
Balance at end of year 116,464,818 100,338,732
-------------------------------------------------------------------------------------------------------
Total capital stock and surplus $ 209,303,135 193,177,049
=======================================================================================================
</TABLE>
See accompanying notes to statutory financial statements.
33
<PAGE> 39
FEDERAL KEMPER LIFE ASSURANCE COMPANY
<TABLE>
<CAPTION>
=======================================================================================================
1993 1992
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided (used):
From operations:
Premiums and considerations $ 328,933,891 360,482,910
Investment income received 169,823,433 168,959,785
Other income received 23,117,121 23,022,140
Benefits paid (305,630,269) (239,214,302)
Commissions, other expenses, and taxes paid (90,627,701) (106,956,702)
Federal income taxes paid (33,733,797) (45,541,780)
Increase in policy loans (4,863,848) (9,923,369)
-------------------------------------------------------------------------------------------------------
Net cash provided by operations 87,018,830 150,828,682
-------------------------------------------------------------------------------------------------------
Investments sold, matured, or repaid:
Bonds 851,873,743 1,676,563,248
Stocks 52,815,656 13,515,345
Mortgage loans 151,019,816 38,692,441
Real estate 35,076 -
Other invested assets 99,327,071 2,531,827
-------------------------------------------------------------------------------------------------------
Investments sold, matured, or repaid 1,155,071,362 1,731,302,861
-------------------------------------------------------------------------------------------------------
Other cash provided 48,498,457 292,659,264
-------------------------------------------------------------------------------------------------------
Total cash provided 1,290,588,649 2,174,790,807
-------------------------------------------------------------------------------------------------------
Cash applied:
Cost of investments acquired:
Bonds 1,033,025,829 2,049,873,404
Stocks 10,424,530 16,858,561
Mortgage loans 109,170,427 81,547,121
Real estate - 107,057
Other invested assets 25,222,333 55,914,092
-------------------------------------------------------------------------------------------------------
Total cost of investments acquired 1,177,843,119 2,204,300,235
-------------------------------------------------------------------------------------------------------
Other cash applied:
Dividends to stockholder 27,699,679 41,682,552
Other 12,305,867 171,479,563
-------------------------------------------------------------------------------------------------------
Total other cash applied 40,005,546 213,162,115
-------------------------------------------------------------------------------------------------------
Total cash applied 1,217,848,665 2,417,462,350
-------------------------------------------------------------------------------------------------------
Net change in cash and short-term investments 72,739,984 (242,671,543)
Cash and short-term investments:
Beginning of year 87,989,313 330,660,856
-------------------------------------------------------------------------------------------------------
End of year $ 160,729,297 87,989,313
=======================================================================================================
</TABLE>
See accompanying notes to statutory financial statements.
34
<PAGE> 40
FEDERAL KEMPER LIFE ASSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Federal Kemper Life Assurance Company (the Company) is a wholly owned
subsidiary of Kemper Corporation (Kemper), a public financial services holding
company. The accompanying statutory financial statements have been prepared in
conformity with accounting practices prescribed or permitted by the Department
of Insurance of the State of Illinois and the National Association of Insurance
Commissioners (NAIC) Accounting Practices and Procedures Manual, which vary in
some respects from generally accepted accounting principles. The significant
statutory accounting policies follow.
The statutory financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the Illinois
Insurance Department, which vary in some respects from generally accepted
accounting principles. The more significant of these differences are as follows:
(1) bonds are generally recorded at amortized cost, and are not classified as
either held-to-maturity securities, trading securities, or available-for-sale
securities; (2) acquisition costs, such as commissions and other costs in
connection with acquiring new business, are charged to current operations as
incurred; (3) life insurance premiums are reported as earned on the anniversary
date of the policy; (4) policy reserves are based on statutory mortality and
interest requirements without consideration of withdrawals, which may differ
from reserves based on reasonably conservative estimates of mortality, interest,
and withdrawals; (5) assets and liabilities are presented net of reinsurance in
statutory basis financial statements; (6) deferred income taxes are not provided
for unrealized gains on investments and temporary differences in the financial
statement and tax basis of assets and liabilities; (7) the asset valuation
reserve is reported as a liability rather than as an appropriation of surplus;
(8) certain assets designated as "nonadmitted assets" (principally furniture and
equipment, agents' debit balances, and certain other classes of receivables)
have been charged to surplus; (9) annuity considerations and other fund deposits
are reflected as revenue rather than as deposits; and (10) realized capital
gains/losses resulting from changes in interest rates are deferred and amortized
over the life of the bond or mortgage sold. The aggregate effect of the
foregoing differences has not been determined.
FAIR VALUE DISCLOSURES
Fair value disclosures are required under Statement of Financial Accounting
Standards No. 107 (SFAS 107). Such fair value estimates are made at a specific
point 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.
Market value for bonds, short-term investments, common stocks, and
preferred stocks represents fair value. (See note 2 captioned Invested Assets).
These market values may differ from NAIC market values reflected in the
Company's annual statement. Fair value estimates for financial instruments other
than bonds, short-term investments, common stocks, and preferred stocks are
generally determined using discounted cash flow models and assumptions which are
based on judgments regarding current economic conditions and risk
characteristics and involve uncertainties and matters of significant judgment.
Although fair value estimates are calculated using assumptions that management
believes are appropriate, changes in assumptions could significantly affect the
estimates and such estimates should be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. In
addition, tax ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates.
Fair value disclosures have been included for investments, separate account
business, certain policy liabilities, and certain off-balance sheet financial
instruments.
35
<PAGE> 41
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
REVENUE AND EXPENSES
Life and interest-sensitive life insurance contract premiums are
recognized as revenue when due, while annuity contract premiums are
recognized as revenue when paid. Expenses, including acquisition costs
related to acquiring new business, such as commissions, are charged to
operations as incurred. Investment income is recognized as earned. The
Company does not accrue interest income on bonds or on mortgage loans,
real estate-related bonds, and other real estate loans where the
likelihood of collection of interest is doubtful.
INVESTED ASSETS
Investments are valued as prescribed by the NAIC. Bonds are valued
generally at amortized cost. Preferred stocks are carried at cost.
Common stocks are carried at market values promulgated by the NAIC.
Short-term investments in commercial paper are carried at cost, which
approximates market value. Mortgage loans are carried at unpaid principal
balances, net of unamortized discount and direct write-downs. Real estate
is carried at depreciated cost less encumbrances and specific write-downs
to fair value for real estate owned. Other invested assets, representing
investments in real estate partnerships, are carried at cost adjusted for
the equity in undistributed earnings or losses of such ventures and cost
for related notes. Realized gains and losses on sale of investments,
determined on the basis of identifiable cost on the sale or disposition of
the respective investment, which are not transferred to the interest
maintenance reserve discussed below, are credited or charged to
operations, net of Federal income taxes. Unrealized gains and losses are
credited or charged to surplus.
The fair value of mortgage loans and other real estate-related investments
is estimated on a project-by-project basis. Generally, the projected cash
flows of the collateral are discounted using a discount rate of 10 percent
to 12 percent. At December 31, 1993 and 1992, the fair value of the
Company's mortgage loans, other real estate- related investments, and the
related accrued interest income, net of real estate reserves and
write-downs, was estimated at approximately $315.7 million and $497.7
million, respectively, compared with the carrying values of $401.0 million
and $563.4 million at December 31, 1993 and 1992, respectively. The
estimate of fair value should be used with care given the inherent
difficulty of estimating fair value due to the lack of a liquid quotable
market.
Policy loans are carried at their unpaid balance. The fair value of
policy loans, which approximates the carrying value of $100.8 million and
$95.9 million at December 31, 1993 and 1992, respectively, is estimated by
discounting the expected future cash flows using an interest rate charged
on policy loans for similar policies currently being issued.
36
<PAGE> 42
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
REAL ESTATE RESERVES
The Company evaluates its real estate-related assets (including accrued
interest) by estimating the probabilities of loss utilizing various
projections that include several factors relating to the borrower,
property, term of the loan, tenant composition, rental rates, other supply
and demand factors, and overall economic conditions. Real estate reserves
are established when declines in collateral values, estimated in light of
current economic conditions and calculated in conformity with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, indicate a
likelihood of loss. Generally, the reserve is based upon the excess of
the loan amount over the estimated future cash flows from the loan
discounted at the loan's contractual rate of interest taking into
consideration the effects of recourse to, and subordination of loans held
by, affiliated nonlife realty companies. Changes in the Company's real
estate reserve and write-downs are included in revenue as a component of
realized investment gain or loss. The additions to the provision for real
estate-related losses include increases to reserves on loans, write-downs
to fair value of certain real estate-related assets and the Company's
share of write-downs by joint ventures.
The Company adopted SFAS No. 114 in the fourth quarter of 1993. Upon
adoption of SFAS No. 114, the Company determined that its previous
disclosure relating to recorded real estate reserves was adequate.
Beginning with the fourth quarter of 1992, the Company decided to reserve
for its estimates of the entire current deficiency, based on net
realizable values, on its loans, taking into consideration the effects of
recourse to, and subordination of loans held by, affiliated nonlife realty
companies, but otherwise without regard to credit available from the
values of other projects, collateral or guarantees. This decision
recognized the effect of the continuing depression in the real estate
markets, which has reduced the number of projects providing positive
support to the portfolio.
The Company's real estate valuation reserve activity during 1993 and 1992
was as follows (in millions).
<TABLE>
<S> <C>
================================================================================
Balance at December 31, 1991 11.8
Change in 1992 reserve 6.8
--------------------------------------------------------------------------------
Balance at December 31, 1992 18.6
Change in 1993 reserve 13.2
--------------------------------------------------------------------------------
Balance at December 31, 1993 31.8
================================================================================
</TABLE>
37
<PAGE> 43
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
During 1992 statutory accounting practices required all life insurance
companies to establish an asset valuation reserve (AVR) and an interest
maintenance reserve (IMR). The AVR provides for a standardized statutory
investment valuation reserve for losses from investments in bonds,
preferred stocks, short-term investments, mortgage loans, common stocks,
real estate, and other invested assets, with related increases or
decreases in the AVR recorded directly to surplus. The IMR defers certain
interest-related gains and losses (net of tax) on fixed income securities,
primarily bonds and mortgage loans, which are then amortized into income
over the remaining lives of the investments sold.
At December 31, 1993, the IMR of $27.0 million represents the unamortized
portion of net realized capital gains which will be amortized into income
as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
Year ended
--------------------------------------------------------------------------------
<S> <C>
1994 $3.5
1995 3.4
1996 3.3
1997 3.2
1998 and thereafter 13.6
--------------------------------------------------------------------------------
Total 27.0
================================================================================
</TABLE>
Prior to the establishment of the AVR, the Company provided a general
valuation reserve for potential losses in real estate-related investments
equivalent to one percent of unreserved real estate as a charge to
surplus. During 1992, $1.1 million of the general reserve was charged as
a realized loss and was allocated to the real estate valuation reserve and
the remaining balance of $2.8 million was transferred to the AVR as a
voluntary contribution.
POLICY LIABILITIES
Aggregate reserves for life policies and contracts are based on statutory
mortality and interest requirements without consideration of withdrawals.
The reserves have been calculated using principally the net level premium
basis and the 1958 and 1980 CSO Mortality Tables with interest rates
varying from 2-1/2 percent to 6 percent.
Deferred annuity reserves are calculated using principally three methods:
for active lives issued before 1984, the accumulation of policyholder net
premiums at the guaranteed rate; for 1984 and later issues, the
Commissioner's Annuity Reserve Valuation Method (CARVM); and for retired
lives, the present value of future payments using 3-1/2 percent interest
and the 1951 Group Annuity Mortality Table with mortality improvements
projected to 1960. The majority of immediate annuities are reserved under
the 1971 Individual Annuity Table or the 1983 "A" Table with interest rate
assumptions ranging from 6 percent to 11-1/4 percent.
38
<PAGE> 44
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
The fair value of aggregate reserves for policies and contracts and other
policyholders' funds relating to investment contracts (primarily deferred
annuities) and universal-life contracts is 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 has projected its future average crediting rate in 1993 and
1992 to be 5.0 percent and 5.37 percent, respectively, while the assumed
average market crediting rate was 5.25 percent in 1993 and 6.0 percent in
1992. The fair value of the investment and universal-life contracts has
been estimated at $1.90 billion and $1.96 billion at December 31, 1993 and
1992, respectively, compared with book values of $2.02 billion and $1.93
billion at December 31, 1993 and 1992, respectively.
FEDERAL INCOME TAXES
Federal income taxes are charged to operations based on income that is
currently payable. No charge to operations is made nor liability
established for the tax effect of timing differences between financial
reporting and taxable income. Significant taxes related to prior-period
tax return adjustments are charged to surplus.
NON-ADMITTED ASSETS
Certain assets designated as "non-admitted assets" have been excluded from
the statement of admitted assets, liabilities, and capital stock and
surplus through a direct charge against unassigned surplus.
CASH FLOW INFORMATION
The Company defines cash as cash in banks and considers all highly liquid
investments with a maturity of one year or less when purchased to be
short-term investments. The Company also transferred its equity ownership
interests in two limited partnerships during 1993 to Kemper. (See note 8
captioned Related-party Transactions).
RECLASSIFICATIONS
Certain 1992 amounts have been reclassified to conform to the 1993
financial statement presentation.
39
<PAGE> 45
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
(2) INVESTED ASSETS
The amortized cost and estimated market value of bonds at December 31,
1993 and 1992 are as follows (in thousands):
<TABLE>
<CAPTION>
==========================================================================================================
1993
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government securities $ 2,459 12 (3) 2,468
Debt securities issued by
foreign governments 68,556 3,198 - 71,754
Corporate and other securities 1,093,463 54,558 (3,838) 1,144,183
Mortgage-backed securities 692,619 26,626 (2,713) 716,532
----------------------------------------------------------------------------------------------------------
Total bonds $ 1,857,097 84,394 (6,554) 1,934,937
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==========================================================================================================
1992
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government securities $ 171,652 66 (2,608) 169,110
Debt securities issued by
foreign governments 30,439 199 (92) 30,546
Corporate and other securities 821,380 38,669 (7,877) 852,172
Mortgage-backed securities 624,588 17,033 (165) 641,456
----------------------------------------------------------------------------------------------------------
Total bonds $ 1,648,059 55,967 (10,742) 1,693,284
==========================================================================================================
</TABLE>
Bonds are carried at amortized cost less specific provisions made for the
permanent decline in the market value of bonds which the Company intends
to sell. During 1993 and 1992 the Company's specific provisions resulted
in realized capital losses of $7.2 million and $14.5 million,
respectively.
40
<PAGE> 46
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
The amortized cost and estimated market value of bonds at December 31,
1993, by contractual maturity, are presented in the following table.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties. Maturities of mortgage-backed securities
will be substantially shorter than their contractual maturity because they
may require monthly principal installments and mortgagees may prepay
principal.
<TABLE>
<CAPTION>
================================================================================
Estimated
Amortized market
cost value
--------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Due in one year or less $ 29,851 30,517
Due after one year through five years 200,391 208,489
Due after five years through ten years 636,576 668,781
Due after ten years 297,660 310,618
Securities not due at a single maturity date -
primarily mortgage-backed securities 692,619 716,532
-------------------------------------------------------------------------------
Total $1,857,097 1,934,937
===============================================================================
</TABLE>
Approximately one-third of the Company's investment-grade fixed maturities
at December 31, 1993 and 1992, were mortgage-backed securities. These
investments consist primarily of marketable mortgage pass-through
securities issued by the Government National Mortgage Association (GNMA),
the Federal National Mortgage Association (FNMA) or the Federal Home Loan
Mortgage Corporation (FHLMC), and other investment-grade securities
collateralized by mortgage pass-through securities issued by these
entities. The Company has not made any material investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed securities are generally of AAA
credit quality.
Markets for the Company's investments in mortgage-backed securities have
been and are expected to remain liquid. The weighted average expected
life of these investments was approximately four and one-half years at
December 31, 1993, as derived from information on nationally recognized
analytical and quotation services making markets in these securities.
Inasmuch as most of these investments were purchased by the Company at
discounts, prepayment activity is not expected to result in any material
losses to the Company because any prepayment would generally accelerate
the reporting of the discounts as investment income. Given the credit
quality, liquidity, and anticipated payment characteristics of the
Company's investments in mortgage-backed securities, the Company does not
believe that they present any material risks.
Proceeds from sales of investments in bonds during 1993 were $851.9
million. Gross gains of $38.7 million and gross losses of $14.7 million
were realized on those sales. Proceeds from sales of investments in bonds
during 1992 were $1.68 billion. Gross gains of $28.5 million and gross
losses of $46.6 million were realized on those sales.
41
<PAGE> 47
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
Bonds with amortized values of $2.5 million were on deposit with
governmental authorities as required by law at December 31, 1993.
The market value of preferred stock was $14.1 million and $18.9 million at
December 31, 1993 and 1992, respectively. The cost of common stock was
$7.2 million and $24.9 million at December 31, 1993 and 1992,
respectively. Gross unrealized gains and gross unrealized losses on
common stock amounted to $12.3 million and $1.6 million at December 31,
1993, respectively, and $6.3 million and $674 thousand at December 31,
1992, respectively.
REAL ESTATE-RELATED INVESTMENTS
The Company's $401.0 million and $563.4 million real estate portfolio at
December 31, 1993 and 1992, respectively, including accrued interest
income and after reserves, consists of joint venture and third-party
mortgage loans, real estate owned, other real estate-related investments,
and real estate-related bonds and stocks. The majority of the Company's
real estate loans are on properties or projects where the Company, Kemper,
Lumbermens Mutual Casualty Company (Lumbermens), or their respective
affiliates have taken ownership positions in joint ventures with a small
number of partners. The Company's real estate portfolio includes both
current pay and deferred interest loans.
The Company's real estate-related bonds, all of which are presently rated
below investment-grade, were issued to the Company by real estate finance
or development companies generally to provide financing for the Company's
and its affiliates' joint ventures for such purposes as land acquisition,
construction/development, refinancing debt, interest, and other operating
expenses. The Company also has other real estate loans and real estate
joint ventures and partnerships included in other invested assets.
Like the bonds, the other real estate loans are notes receivable that
generally are unsecured. These loans have provided financing to joint
ventures for purposes similar to those funded by real estate-related
bonds. The real estate joint ventures and partnership equity investments
in real estate at December 31, 1993, consist of the Company's net equity
investments in joint ventures. The equity investments include the
Company's share of periodic operating results. The Company, as an equity
owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain joint ventures.
The Company's real estate owned at December 31, 1993 includes $15.9
million of deeds in lieu of foreclosure and $113 thousand of certain
purchased properties.
The Company's real estate-related loans, including real estate-related
bonds but excluding $15.9 million of real estate owned and $49.4 million
of the Company's net equity investments in joint ventures, totaled $321.7
million at December 31, 1993 after reserves and write-downs. Of this
amount, $193.1 million are on accrual status. Of the accrual loans, 68.7
percent have terms requiring current periodic payments of their full
contractual interest, 20.9 percent require only partial payments or
payments to the extent of the cash flow of the borrowers, and 10.4 percent
defer all interest to maturity.
42
<PAGE> 48
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
Included in the carrying value of the real estate portfolio, the Company
has accrued interest receivable on mortgage loans and other real
estate-related investments totaling $14.2 million at December 31, 1993 and
$20.4 million at December 31, 1992. These amounts are considered in the
Company's evaluation of real estate reserves.
REAL ESTATE CONCENTRATIONS
The Company's portfolio is distributed by property type and geographic
location. Property types at December 31, 1993 included office (38.3
percent), land (8.8 percent), retail (13.2 percent), mixed-use (2.4
percent), apartment (6.2 percent), hotel (6.6 percent), and industrial
(9.0 percent).
Real estate markets have been depressed in recent periods in areas where
most of the Company's real estate portfolio is located. In California,
where approximately 38.9 percent of the portfolio is located, real estate
market conditions have continued to be worse than in many other areas of
the country. Illinois and Texas accounted for 23.1 percent and 15.3
percent, respectively, of the portfolio at December 31, 1993, and no other
state accounted for more than 5 percent.
Undeveloped land represented approximately 8.8 percent of the Company's
real estate portfolio at December 31, 1993. To maximize the value of
certain land and other projects, additional development is proceeding or
is planned. Such development of existing projects may continue to require
substantial funding, either from the Company or third parties. In the
present real estate markets, third-party financing can require credit
enhancing arrangements from the Company. The values of development
projects are dependent on a number of factors, including obtaining
necessary 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 the
Company's plans with respect to such projects may not change
substantially.
At December 31, 1993, the Company's loans to and investments in projects
with the Prime Group, Inc. or its affiliates, based in Chicago,
represented approximately $150.4 million or 38.9 percent, of the Company's
real estate portfolio. This amount includes $50.5 million in fundings
during 1993. Prime Group-related commitments accounted for $11.2 million
of the off-balance sheet commitments at December 31, 1993, of which the
Company expects to fund $10.8 million.
Effective January 1, 1993, Kemper and its subsidiaries formed a master
limited partnership (MLP) with Lumbermens and its subsidiaries. The
assets of the MLP consist of the equity interests each partners or its
subsidiaries previously owned in projects with Peter B. Bedford or his
affiliates (Bedford), a California-based real estate developer. As MLP
partners, Kemper and Lumbermens have participated in funding certain cash
needs of the Bedford- related projects. During 1993, the Company provided
$48.9 million of fundings to projects with Bedford. Kemper's affected
equity interests in real estate are held almost entirely by the real
estate subsidiaries of Kemper. Of the Company's real estate portfolio at
December 31, 1993, approximately $165.5 million, or 42.8 percent,
represented loans to and investments in MLP-owned joint ventures.
43
<PAGE> 49
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
Pursuant to agreements entered into in January 1994, Bedford transferred
to the MLP and a Kemper affiliate all of Bedford's ownership interest in
ventures in which Bedford, Kemper, Lumbermens, and their respective
subsidiaries previously shared ownership interests. Bedford was released
from certain recourse liabilities owed to the MLP, the ventures,
Lumbermens, Kemper, and certain of their respective subsidiaries. Because
Kemper's reserve methodology does not take any credit for such recourse
and because Kemper in 1993 had already been recording 50 percent of
operating results of the related ventures, this transaction, which
simplifies the management of Kemper's portfolio, does not have any
material adverse impact on Kemper's or the Company's results of operations
or financial condition.
The Company has continued to fund both existing projects and legal
commitments. The commitments were $129.3 million at December 31, 1993.
This amount represented a net decrease of $24.9 million since year-end
1992, largely due to fundings in 1993. As of December 31, 1993, the
Company expects to fund approximately $61.8 million of these commitments,
along with providing capital to existing projects. The commitments, along
with estimated costs to complete, are considered in the Company's
evaluation of reserves and write-downs.
Generally, at the inception of a real estate loan, the Company anticipated
that it would roll over the loan and reset the interest rate at least one
time in the future, although the Company is not legally committed to do
so. As a result of the current weakness in the real estate markets and
fairly restrictive lending practices by other lenders in this environment,
the Company expects that all or most loans maturing in 1994 will be rolled
over, restructured, or foreclosed.
TROUBLED REAL ESTATE
The following table is a summary of the Company's troubled real
estate-related investments at year-end 1993 and 1992.
<TABLE>
<CAPTION>
=================================================================================
December 31
-------------------
1993 1992
---------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Potential problem loans (1) $ - 34.5
Past due loans (2) 18.7 6.9
Nonaccrual loans (3) 141.6 184.0
Restructured loans (currently performing) (4) 42.3 24.0
Real estate owned (5) 15.9 16.1
---------------------------------------------------------------------------------
Total $ 218.5 (6) 265.5
=================================================================================
</TABLE>
44
<PAGE> 50
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
(1) These are real estate-related investments where the Company, based on
known information, has serious doubts about the borrowers' abilities
to comply with present repayment terms and which the Company
anticipates may go into nonaccrual, past due, or restructured status.
(2) Interest more than 90 days past due and on nonaccrual status.
(3) The Company does not accrue interest on real estate-related
investments when the likelihood of collection of interest is doubtful.
The decrease in nonaccrual loans in 1993 primarily reflects sales of
nonaccrual loans and direct write-downs during 1993.
(4) The Company defines a "restructuring" of debt as an event whereby the
Company, for economic or legal reasons related to the debtor's
financial difficulties, grants a concession to the debtor it would not
otherwise consider. Such concessions either stem from an agreement
between the Company and the debtor or are imposed by law or a court.
By this definition, restructured loans do not include any loan that,
upon the expiration of its term, both repays its principal and pays
interest then due from the proceeds of a new loan that the Company, at
its option, may extend (roll over).
(5) Real estate owned includes foreclosures, deeds in lieu of foreclosure,
and certain purchased properties.
(6) Total reserves and cumulative write-downs are 16.6 percent of total
troubled real estate-related investments and 8.6 percent of the
Company's total real estate portfolio before reserves and write-downs
at December 31, 1993.
The Company's real estate experience could continue to be adversely
affected by overbuilding and weak economic conditions in certain real
estate markets and by tight lending practices by banks and other lenders.
Stagnant or worsening economic conditions in the areas in which the
Company has made loans, or additional adverse information becoming known
to the Company through its regular reviews or otherwise, could result in
higher levels of problem loans or potential problem loans, reductions in
the value of real estate collateral, and adjustments to the real estate
reserve. Potential accounting impacts from the Company's real estate
portfolio could be material to the invested asset portfolio and future
results of operations.
Current conditions in the real estate markets are adversely affecting the
financial resources of the Company's joint venture partners. Each
partner, however, remains active in the control of its respective joint
ventures. In evaluating a partner's ability to meet its financial
commitments, the Company considers the amount of all debt and the value of
all properties within that portion of the Company's portfolio consisting
of loans to and investments in joint ventures with such partner.
Based on the level of troubled real estate-related investments the Company
experienced in 1993 and 1992, the Company anticipates additional
foreclosures and deeds in lieu of foreclosures in 1994. Any consolidation
accounting resulting from foreclosures would add the related ventures'
assets and senior third-party liabilities to the Company's balance sheet
and eliminate the Company's loans to such ventures.
45
<PAGE> 51
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
Due to the adverse real estate environment affecting the Company's
portfolio in recent years, the Company has devoted significant attention
to its real estate portfolio, enhancing monitoring of the portfolio, and
formulating specific action plans addressing nonperforming and potential
problem loans. Since 1991, the Company has intensified its attention to
evaluating the asset quality, cash flow, and prospects associated with
each of its projects. Kemper also established Kemper Portfolio Corp., an
affiliated company, which purchased for cash certain real estate-related
investments from the Company. These actions serve to strengthen the
Company's capital position, asset quality, and earnings stream.
The Company is analyzing various potential transactions designed to reduce
the level of real estate-related investments on the Company's statement of
admitted assets, liabilities, and capital stock and surplus. Specific
types of transactions under consideration include loan sales, property
sales, mortgage refinancings, and real estate investment trusts.
OTHER CONCENTRATIONS OF CREDIT RISK
At December 31, 1993, below investment-grade securities holdings (NAIC
classes 3 through 6) including real estate- related bonds decreased to
$114.9 million or 4.5 percent of cash and invested assets compared with
$187.9 million or 7.8 percent at year-end 1992. Below investment-grade
securities are generally unsecured and often subordinated to other
creditors of the issuers. These issuers may have relatively higher levels
of indebtedness and be more sensitive to adverse economic conditions than
investment-grade issuers. At December 31, 1993, below investment- grade
securities of approximately 18 issuers were held by the Company.
OFF-BALANCE SHEET RISK
At December 31, 1993, the Company had loan commitments and standby
financing agreements totaling $129.3 million to support the financing
needs of various real estate investments. To the extent these
arrangements are called upon, amounts loaned would be secured by assets of
the joint ventures, including first mortgage liens on the real estate.
The Company's criteria in making these arrangements is the same as for its
mortgage loans and other real estate- related investments. The Company
presently expects to fund approximately $61.8 million of these
arrangements. These commitments are included in the Company's analysis of
real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction
with and using the same methodology as the fair value estimates of
mortgage loans and other real estate-related investments.
The Company has entered into securities lending transactions as of
December 31, 1993 involving $22.2 million of bonds. The Company's
position is fully collateralized by cash and other U.S. Government-backed
securities.
46
<PAGE> 52
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
(3) FEDERAL INCOME TAXES
The actual Federal income tax expense on operations for 1993 and 1992
differed from "expected" tax expense ("expected" tax is computed by
applying the corporate tax rate of 35 percent and 34 percent to gain from
operations before Federal income tax expense for 1993 and 1992,
respectively) as follows (in thousands):
<TABLE>
<CAPTION>
=================================================================================
1993 1992
---------------------------------------------------------------------------------
<S> <C> <C>
Computed "expected" tax expense $ 28,198 19,013
Change in statutory reserves over tax reserves (688) 1,239
Proxy tax on insurance acquisition costs 4,942 4,679
Deferred intercompany gain 4,542 -
Adjustment of prior year accrual (6,408) (704)
Lease agreement (1,475) (2,073)
Other, net (551) 980
---------------------------------------------------------------------------------
Total Federal income tax expense $ 28,560 23,134
=================================================================================
</TABLE>
The operations of the Company are included in the consolidated Federal
income tax return of Kemper and its subsidiaries. Income taxes payable or
refundable are determined on a separate return basis by the Company and
remitted to, or received from, Kemper.
Kemper's Federal income tax returns through the year 1986 have been
examined by the Internal Revenue Service (IRS). Changes proposed are not
material to the Company's financial position. The tax returns for the
years 1987 through 1990 are currently under examination by the IRS. As
part of the examinations, the IRS challenged certain of the Company's
deductions and as such the Company charged directly to surplus, in 1993
and 1992, $800 thousand and $3.4 million, respectively, to cover the
additional taxes owed with respect to these issues.
(4) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements for the purpose of limiting its exposure to loss on any one
single insured or to diversify their risk and limit their overall
financial exposure. For individual life products, the Company generally
retains only the first $300 thousand (face amount) on the life of any one
individual, with the excess portions of life insurance risk ceded to
reinsurers. Although these reinsurance agreements contractually obligate
the reinsurers to reimburse the Company, they do not discharge the Company
from its primary liability and obligations to policyholders.
47
<PAGE> 53
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
The Company has ceded a significant amount of life insurance premiums
under various reinsurance contracts for the portion of life insurance in
excess of the Company's retention limits on policies written before 1992
with Fidelity Life Association, a Mutual Legal Reserve Company (FLA), an
affiliated company. Beginning in 1992, the Company began to reinsure the
excess of insurance risks over the Company's retention limits with other
unaffiliated insurance companies. At December 31, 1993 and 1992, the
deductions for reinsurance ceded to FLA and other unaffiliated insurance
companies was as follows (in millions):
<TABLE>
<CAPTION>
=================================================================================
1993 1992
---------------------------------------------------------------------------------
<S> <C> <C>
Reserves ceded to FLA $ 48.2 54.9
Reserves ceded to unaffiliated insurance companies 14.1 7.3
---------------------------------------------------------------------------------
Total reserves ceded $ 62.3 62.2
=================================================================================
</TABLE>
Such amounts relate to life insurance in force at December 31, 1993 and
1992 as follows (in billions):
<TABLE>
<CAPTION>
=================================================================================
1993 1992
---------------------------------------------------------------------------------
<S> <C> <C>
Direct and assumed $ 89.6 82.4
=================================================================================
Ceded to:
FLA $ 16.1 19.2
Unaffiliated insurance companies 11.2 5.7
=================================================================================
</TABLE>
48
<PAGE> 54
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
(5) SEPARATE ACCOUNT BUSINESS
The Company has a separate account primarily for funds deposited with it
by Lumbermens and certain of its subsidiaries, Economy Fire & Casualty
Company of Decatur (formerly Federal Kemper Insurance Company), Kemper and
the Company's retirement plans. The stockholder and the policyholders of
the Company have no claim to the assets held in the separate account. In
the event of dissolution, assets in the account and income from those
assets may only be distributed to the retirement plans. The assets of the
separate account are carried at market value. As of December 31 the
market values of these assets are as shown below (in thousands):
<TABLE>
<CAPTION>
==========================================================================================
Admitted value
1993 1992
------------------------------------------------------------------------------------------
<S> <C> <C>
Long-term bonds, at market (amortized cost: $58,253 and
$64,079 in 1993 and 1992, respectively) $ 60,020 64,946
Short-term bonds at amortized cost, which approximates market 18,552 19,466
Common stocks, at market (cost: $232,396 and
$201,291 in 1993 and 1992, respectively) 302,776 283,622
Cash (3,059) 1,382
Investment income due and accrued 1,132 1,462
Other receivables 4,734 3,331
------------------------------------------------------------------------------------------
Total $ 384,155 374,209
==========================================================================================
</TABLE>
(6) EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory defined benefit pension plan which
covers substantially all eligible employees. Benefits are accrued each
year based on the employees' annual compensation, subject to a minimum
benefit based upon a final pay formula. The Company's funding and
accounting policies are to contribute annually the maximum amount that can
be deducted for Federal income tax purposes. No contributions were made
to the plan in 1993. As of December 31, 1992 a $278 thousand contribution
was made to the plan.
49
<PAGE> 55
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
The following table sets forth the plan's funded status at December 31,
1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
================================================================================================
1993 1992
------------------------------------------------------------------------------------------------
<S> <C> <C>
Plan assets at fair value - (primarily stocks and bonds
held in the Company's separate accounts) $ 5,600 4,678
Actuarial present value of projected benefit obligations for service
provided to date (includes accumulated benefit obligation (ABO)
of $4,700 of which $4,438 was vested in 1993, and an
ABO of $3,612 of which $3,452 was vested in 1992) (7,193) (5,331)
------------------------------------------------------------------------------------------------
Excess of projected benefit obligation over plan assets $ (1,593) (653)
================================================================================================
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations were 7.0 percent and 7.5 percent for 1993
and 1992, respectively. The expected long-term rate of return on plan
assets was 8.5 percent for both 1993 and 1992.
The Company also has a savings and profit-sharing plan for all eligible
employees and a deferred compensation plan for certain senior officers.
Contributions by the Company to the plans for the years ended December 31,
1993 and 1992 amounted to $57 thousand and $370 thousand, respectively.
(7) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors a welfare plan that provides medical and life
insurance benefits to its retired and active employees. The Company is
self insured, and the plan is not funded. The medical plan provides for
medical insurance benefits at retirement, with eligibility based upon age
and the participant's number of years of participation attained at
retirement. The plan is contributory for pre-Medicare retirees, and will
be contributory for all retiree coverage for most current employees, with
contributions generally adjusted annually. Postretirement life insurance
benefits are noncontributory and are limited to $10,000 per participant.
Effective January 1, 1993, the Company changed its method of accounting
for the costs of its retiree benefit plans to the accrual method and
elected to amortize its transition obligation for retirees and fully
eligible or vested employees as an expense over a period of ten years.
The unrecognized transition obligation was $559 thousand as of December
31, 1993.
Net postretirement benefit costs for the year ended December 31, 1993 were
$144 thousand and includes the expected cost of such benefits for newly
eligible or vested employees, interest cost, gains and losses arising from
differences between actuarial assumptions, and actual experience and
amortization of the transition obligation.
50
<PAGE> 56
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Notes to Statutory Financial Statements
================================================================================
At December 31, 1993 the accumulated and unfunded postretirement benefit
obligation for retirees and other fully eligible or vested participants
was $456 thousand. The discount rate used in determining the accumulated
benefit obligation was 7 percent in 1993 and the health care cost trend
rate was based on projected experience in 1994 and 10 percent in 1995,
gradually declining to 6 percent by the year 1999, and remaining at that
level thereafter.
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit
obligation as of December 31, 1993 by $55 thousand and the net
postretirement benefit health care interest and service costs for the year
ended December 31, 1993 by $5 thousand.
(8) RELATED-PARTY TRANSACTIONS
During 1993 and 1992 the Company paid cash dividends to Kemper of $31.7
million and $41.7 million, respectively. The Company also paid a noncash
dividend to Kemper of $4.0 million in December 1993 which represented the
net deficit equity ownership interest in two limited partnerships. Kemper
has given the Company a parental guarantee to fully and unconditionally
guarantee the commitments of the Company incurred in connection with the
Company's business.
During 1993 and 1992, the Company sold $103.4 million and $41.7 million of
certain mortgages and real estate- related investments, net of reserves,
to Kemper Portfolio Corp., an affiliated Company, in exchange for cash.
No gain or loss was recognized on the sales.
The Company shares certain other operations with FLA and Kemper Investors
Life Insurance Company (KILICO). Allocation of these common expenses is
based upon relative volume levels and time studies. Allocated expenses
paid by the Company amounted to $1.2 million and $1.3 million in 1993 and
1992, respectively. The Company is also allocated investment management
fees from the Company's portfolio manager, Kemper Financial Services, Inc.
(KFS), an affiliated company, which amounted to $2.7 million and $2.8
million during 1993 and 1992, respectively.
The Company reinsures certain risks with FLA. The Company receives a
ceding commission allowance from FLA under the reinsurance agreements.
Premiums ceded to and the related commission allowance received from this
business amounted to $44.2 million and $8.2 million in 1993 and $63.6
million and $22.0 million in 1992, respectively.
(9) CAPITAL STOCK AND SURPLUS
The maximum amount of dividends which can be paid by State of Illinois
insurance companies to shareholders without prior approval from the
director of insurance is the greater of the prior year's statutory net
gain from operations or 10 percent of the prior year-end statutory
surplus. Accordingly, the maximum dividend permissible in 1994 is $52.0
million.
51
<PAGE> 57
FEDERAL KEMPER LIFE ASSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
================================================================================
Under asset adequacy and risk-based capital rules adopted in 1993 in the
state of Illinois, state regulators may mandate remedial action for
inadequately reserved or inadequately capitalized companies. The new asset
adequacy rules are designed to assure that reserves and assets are adequate
to cover liabilities under a variety of economic scenarios. The focus of
the new capital rules is a risk-based formula that applies prescribed
factors to various risk elements in an insurer's business and investments
to develop a minimum capital requirement designed to be proportional to the
amount of risk assumed by the insurer. The Company has reserves and capital
levels exceeding any which would mandate action under the new rules.
(10) CONTINGENT LIABILITIES
The Company is liable for guaranty fund assessments against certain
unaffiliated insurance companies that have become insolvent during the
years 1993 and prior. These assessments are reflected in the operating
results of the Company. The Company is also contingently liable for any
future guaranty fund assessments related to insolvencies of unaffiliated
insurance companies, although no specific amount can be reasonably
estimated at December 31, 1993.
The Company has been named as defendant in certain lawsuits incidental to
its insurance business. Management of the Company, after consultation with
outside legal counsel, believes that the resolution of these various
lawsuits will not result in any material adverse effect on the Company's
financial position.
(11) EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
As a result of the overall rise in general interest rates subsequent to
year-end 1993, the estimated market value of the Company's bond portfolio
has declined. As of March 31, 1994 the estimated market value of the
Company's bond portfolio now approximates amortized cost.
52
<PAGE> 58
APPENDIX A
ILLUSTRATIONS OF CASH VALUES,
CASH SURRENDER VALUES,
DEATH BENEFITS
The tables in this Prospectus have been prepared to help show how values
under a Policy change with investment experience. The tables illustrate how Cash
Values, Surrender Values (reflecting the deduction of Surrender Charges, if any)
and Death Benefits under a Policy issued on an insured of a given age would vary
over time if the hypothetical gross investment rates of return were a uniform,
after tax, annual rate of 0%, 6%, and 12%. If the hypothetical gross investment
rate of return averages 0%, 6%, or 12%, but fluctuates over or under those
averages throughout the years, the Cash Values, Surrender Values and Death
Benefits may be different.
The amounts shown for the Cash Value, Surrender Value and Death Benefit as
of each Policy Anniversary reflect the fact that the net investment return on
the assets held in the Subaccounts is lower than the gross return. This is
because of a daily charge to the Subaccounts for assuming mortality and expense
risks, which is equivalent to an effective annual charge of 0.60% on a current
basis. This charge is guaranteed not to exceed an effective annual rate of
0.90%. In addition, the net investment returns also reflect the deduction of the
Fund investment advisory fees and other Fund expenses, (.65%, the average of the
fees and expenses for 1993). The tables also reflect applicable charges and
deductions including a 3.5% deduction against premiums, a monthly administrative
charge of $5 and monthly charges for providing insurance protection. For each
hypothetical gross investment rate of return, tables are provided reflecting
current and guaranteed cost of insurance charges. Hypothetical gross average
investment rates of return of 0%, 6% and 12% correspond to the following
approximate net annual investment rate of return of -1.25%, 4.75% and 10.75%, on
a current basis. On a guaranteed basis, these rates of return would be -1.55%,
4.45% and 10.45%, respectively. Cost of insurance rates vary by issue age, sex,
rating class and Policy Year and, therefore, are not reflected in the
approximate net annual investment rate of return above.
The values shown are for Policies which are issued to a male preferred
nonsmoker. Values for Policies issued on a basis involving a higher mortality
risk would result in lower Cash Values, Surrender Values and Death Benefits than
those illustrated. Females generally have a more favorable rate structure than
males.
The tables also reflect the fact that no charges for federal, state or
other income taxes are currently made against the Separate Account. If such a
charge is made in the future, it will take a higher gross rate of return than
illustrated to produce the net after-tax returns shown in the tables.
Upon request, FKLA will furnish an illustration based on the proposed
Insured's age, sex and premium payment requested.
53
<PAGE> 59
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER $1,000 ANNUAL PREMIUM ISSUE AGE 35
$100,000 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS --------------------------- ---------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ --------- ----- --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 720 660 100,000 771 711 100,000 822 762 100,000
2 2,153 1,422 1,302 100,000 1,568 1,448 100,000 1,721 1,601 100,000
3 3,310 2,103 1,923 100,000 2,391 2,211 100,000 2,704 2,524 100,000
4 4,526 2,761 2,521 100,000 3,239 2,999 100,000 3,779 3,539 100,000
5 5,802 3,398 3,098 100,000 4,113 3,813 100,000 4,954 4,654 100,000
6 7,142 4,010 3,710 100,000 5,011 4,711 100,000 6,238 5,938 100,000
7 8,549 4,596 4,316 100,000 5,934 5,654 100,000 7,642 7,632 100,000
8 10,027 5,158 4,918 100,000 6,882 6,642 100,000 9,179 8,939 100,000
9 11,578 5,692 5,512 100,000 7,856 7,676 100,000 10,861 10,861 100,000
10 13,207 6,199 6,199 100,000 8,854 8,854 100,000 12,703 12,703 100,000
11 14,917 6,675 6,675 100,000 9,876 9,876 100,000 14,720 14,720 100,000
12 16,713 7,119 7,119 100,000 10,922 10,922 100,000 16,931 16,931 100,000
13 18,599 7,531 7,531 100,000 11,991 11,991 100,000 19,356 19,356 100,000
14 20,579 7,908 7,908 100,000 13,082 13,082 100,000 22,018 22,018 100,000
15 22,657 8,248 8,248 100,000 14,196 14,196 100,000 24,942 24,942 100,000
16 24,840 8,548 8,548 100,000 15,329 15,329 100,000 28,155 28,155 100,000
17 27,132 8,801 8,801 100,000 16,478 16,478 100,000 31,687 31,687 100,000
18 29,539 9,004 9,004 100,000 17,640 17,640 100,000 35,573 35,573 100,000
19 32,066 9,149 9,149 100,000 18,808 18,808 100,000 39,850 39,850 100,000
20 34,719 9,231 9,231 100,000 19,980 19,980 100,000 44,564 44,564 100,000
-----------------------------------------------------------------------------------------------------------------------
Age 65 69,761 4,794 4,794 100,000 30,692 30,693 100,000 129,737 129,737 158,279
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.
(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY FEDERAL KEMPER LIFE ASSURANCE COMPANY THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
54
<PAGE> 60
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER $1,000 ANNUAL PREMIUM ISSUE AGE 35
$100,000 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ----------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
------ --------- ------ --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 763 703 100,000 815 755 100,000 867 807 100,000
2 2,153 1,518 1,398 100,000 1,670 1,550 100,000 1,828 1,708 100,000
3 3,310 2,265 2,085 100,000 2,567 2,387 100,000 2,895 2,715 100,000
4 4,526 3,003 2,763 100,000 3,508 3,268 100,000 4,077 3,837 100,000
5 5,802 3,732 3,432 100,000 4,494 4,194 100,000 5,388 5,088 100,000
6 7,142 4,454 4,154 100,000 5,529 5,229 100,000 6,843 6,543 100,000
7 8,549 5,167 4,887 100,000 6,614 6,334 100,000 8,455 8,175 100,000
8 10,027 5,873 5,633 100,000 7,753 7,513 100,000 10,244 10,004 100,000
9 11,578 6,571 6,391 100,000 8,947 8,767 100,000 12,227 12,047 100,000
10 13,207 7,260 7,260 100,000 10,200 10,200 100,000 14,426 14,426 100,000
11 14,917 7,943 7,943 100,000 11,513 11,513 100,000 16,865 16,865 100,000
12 16,713 8,617 8,617 100,000 12,891 12,891 100,000 19,570 19,570 100,000
13 18,599 9,284 9,284 100,000 14,337 14,337 100,000 22,569 22,569 100,000
14 20,579 9,943 9,943 100,000 15,853 15,853 100,000 25,895 25,895 100,000
15 22,657 10,595 10,595 100,000 17,443 17,443 100,000 29,584 29,584 100,000
16 24,840 11,240 11,240 100,000 19,110 19,110 100,000 33,674 33,674 100,000
17 27,132 11,878 11,878 100,000 20,860 20,860 100,000 38,211 38,211 100,000
18 29,539 12,508 12,508 100,000 22,695 22,695 100,000 43,241 43,241 100,000
19 32,066 13,132 13,132 100,000 24,619 24,619 100,000 48,820 48,820 100,000
20 34,719 13,748 13,748 100,000 26,638 26,638 100,000 55,007 55,007 100,000
-------------------------------------------------------------------------------------------------------------------------
Age 65 69,761 16,251 16,251 100,000 50,068 50,068 100,000 166,359 166,359 202,958
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.
(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY FEDERAL KEMPER LIFE ASSURANCE COMPANY THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
55
<PAGE> 61
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER $3,000 ANNUAL PREMIUM ISSUE AGE 55
$100,000 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ----------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ --------- ------ --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 1,996 1,816 100,000 2,142 1,962 100,000 2,289 2,109 100,000
2 6,458 3,897 3,537 100,000 4,316 3,956 100,000 4,754 4,394 100,000
3 9,930 5,703 5,163 100,000 6,522 5,982 100,000 7,414 6,874 100,000
4 13,577 7,407 6,687 100,000 8,756 8,036 100,000 10,286 9,566 100,000
5 17,406 9,004 8,104 100,000 11,015 10,115 100,000 13,392 12,492 100,000
6 21,426 10,486 9,586 100,000 13,292 12,292 100,000 16,754 15,854 100,000
7 25,647 11,844 11,004 100,000 15,583 14,743 100,000 20,400 19,560 100,000
8 30,080 13,064 12,344 100,000 17,877 17,157 100,000 24,357 23,637 100,000
9 34,734 14,132 13,592 100,000 20,165 19,625 100,000 28,661 28,121 100,000
10 39,620 15,035 15,035 100,000 22,438 22,438 100,000 33,358 33,358 100,000
11 44,751 15,760 15,760 100,000 24,692 24,692 100,000 38,504 38,504 100,000
12 50,139 16,294 16,294 100,000 26,920 26,920 100,000 44,170 44,170 100,000
13 55,796 16,624 16,624 100,000 29,119 29,119 100,000 50,445 50,445 100,000
14 61,736 16,731 16,731 100,000 31,285 31,285 100,000 57,434 57,434 100,000
15 67,972 16,588 16,588 100,000 33,405 33,405 100,000 65,264 65,264 100,000
16 74,521 16,157 16,157 100,000 35,463 35,463 100,000 74,093 74,093 100,000
17 81,397 15,389 15,389 100,000 37,437 37,437 100,000 84,122 84,122 100,000
18 88,617 14,215 14,215 100,000 39,298 39,298 100,000 95,535 95,535 106,043
19 96,198 12,564 12,564 100,000 41,016 41,016 100,000 108,163 108,163 117,898
20 104,158 10,355 10,355 100,000 42,566 42,566 100,000 122,122 122,122 130,671
--------------------------------------------------------------------------------------------------------------------------
Age 65 39,620 15,035 15,035 100,000 22,438 22,438 100,000 33,358 33,358 100,000
Age 70 67,972 16,588 16,588 100,000 33,405 33,405 100,000 65,264 65,264 100,000
Age 75 104,158 10,355 10,355 100,000 42,566 42,566 100,000 122,122 122,122 130,671
Age 80 150,340 0 0 0 46,918 46,918 100,000 216,054 216,054 226,857
Age 85 209,282 0 0 0 39,008 39,008 100,000 363,649 353,649 381,831
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.
(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY FEDERAL KEMPER LIFE ASSURANCE COMPANY THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
56
<PAGE> 62
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER $3,000 ANNUAL PREMIUM ISSUE AGE 55
$100,000 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ----------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ --------- ------ --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,219 2,039 100,000 2,372 2,192 100,000 2,526 2,346 100,000
2 6,458 4,423 4,063 100,000 4,872 4,512 100,000 5,340 4,980 100,000
3 9,930 6,613 6,073 100,000 7,506 6,966 100,000 8,475 7,935 100,000
4 13,577 8,788 8,068 100,000 10,282 9,562 100,000 11,968 11,248 100,000
5 17,406 10,949 10,049 100,000 13,207 12,307 100,000 15,860 14,960 100,000
6 21,426 13,096 12,196 100,000 16,290 15,390 100,000 20,197 19,297 100,000
7 25,647 15,229 14,389 100,000 19,538 18,698 100,000 25,028 24,188 100,000
8 30,080 17,347 16,627 100,000 22,961 22,241 100,000 30,411 29,691 100,000
9 34,734 19,452 18,912 100,000 26,568 26,028 100,000 36,409 35,869 100,000
10 39,620 21,543 21,543 100,000 30,370 30,370 100,000 43,091 43,091 100,000
11 44,751 23,621 23,621 100,000 34,376 34,376 100,000 50,536 50,536 100,000
12 50,139 25,685 25,685 100,000 38,597 38,597 100,000 58,831 58,831 100,000
13 55,796 27,735 27,735 100,000 43,045 43,046 100,000 68,073 68,073 100,000
14 61,736 29,772 29,772 100,000 47,734 47,734 100,000 78,371 78,371 100,000
15 67,972 31,795 31,795 100,000 52,674 52,674 100,000 89,839 89,839 104,213
16 74,521 33,805 33,805 100,000 57,880 57,880 100,000 102,547 102,547 117,929
17 81,397 35,802 35,802 100,000 63,366 63,366 100,000 116,623 116,623 131,784
18 88,617 37,786 37,786 100,000 69,148 69,148 100,000 132,215 132,215 146,759
19 96,198 39,757 39,757 100,000 75,240 75,240 100,000 149,490 149,490 162,945
20 104,158 41,715 41,715 100,000 81,660 81,660 100,000 168,633 168,633 180,437
-------------------------------------------------------------------------------------------------------------------------
Age 65 39,620 21,543 21,543 100,000 30,370 30,370 100,000 43,091 43,091 100,000
Age 70 67,972 31,795 31,795 100,000 52,674 52,674 100,000 89,839 89,839 180,437
Age 80 150,340 44,816 44,816 100,000 118,100 118,100 124,005 298,239 298,239 313,151
Age 85 209,282 43,281 43,281 100,000 163,390 163,390 171,560 510,361 510,361 535,879
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.
(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY FEDERAL KEMPER LIFE ASSURANCE COMPANY THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
57
<PAGE> 63
APPENDIX B
TABLE OF DEATH BENEFIT FACTORS
<TABLE>
<CAPTION>
ATTAINED ATTAINED ATTAINED ATTAINED
AGE* PERCENT AGE* PERCENT AGE* PERCENT AGE* PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250 50 185 60 130 70 115
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 101
95-99 100
</TABLE>
* ATTAINED AGE AS OF THE BEGINNING OF THE POLICY YEAR
58
<PAGE> 64
Distributed by
Investors Brokerage Services, Inc.
A Variable Life Product Offered by
FEDERAL KEMPER LIFE ASSURANCE COMPANY
[LOGO]
1 Kemper Drive
Long Grove, IL 60049
708/320-4500
[LOGO] PRINTED ON RECYCLED PAPER Policy Form Series S-4050
<PAGE> 65
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
UNDERTAKING PURSUANT TO RULE 484(B)(1)
UNDER THE SECURITIES ACT OF 1933
Pursuant to the Distribution Agreement filed as Exhibit 1-A(3)(a) to this
Registration Statement, Federal Kemper Life Assurance Company (FKLA) and the
Separate Account will agree to indemnify Investors Brokerage Services, Inc.
(IBS) against any claims, liabilities and expenses which IBS may incur under the
Securities Act of 1933, common law or otherwise, arising out of or based upon
any alleged untrue statements of material fact contained in any registration
statement or prospectus of the Separate Account, or any omission to state a
material fact therein, the omission of which makes any statement contained
therein misleading. IBS will agree to indemnify FKLA and the Separate Account
against any and all claims, demands, liabilities and expenses which FKLA or the
Separate Account may incur, arising out of or based upon any act or deed of IBS
or of any registered representative of an NASD member investment dealer which
has an agreement with IBS and is acting in accordance with FKLA's instructions.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of FKLA
or the Separate Account (by virtue of the fact that they may also be agents,
employees or controlling persons of IBS) pursuant to the foregoing provisions,
or otherwise FKLA and the Separate Account have been advised that in the opinion
of the Securities and Exchange Commission such indemnification may be against
public policy as expressed in the Act and may be, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by FKLA or the Separate Account of expenses incurred or paid by a
director, officer or controlling person of FKLA or the Separate Account in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, FKLA and the Separate Account will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-1
<PAGE> 66
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The Facing sheet.
Reconciliation and tie between items in N-8B-2 and Prospectus.
The prospectus consisting of 59 pages.
The undertaking to file reports.
Undertaking pursuant to Rule 484(b)(1) under the Securities Act
of 1933.
The signatures.
Written consents of the following persons:
A. Frank J. Julian, Esq. (Included in Opinion filed as Exhibit
3(a)).
C. KPMG Peat Marwick LLP, independent auditors (Included in
Opinion filed as Exhibit 6(a)).
D. Steven Powell, FSA (Included in Opinion filed as Exhibit
3(b)).
The following exhibits:
<TABLE>
<S> <C>
*1-A(1) FKLA Resolution establishing the Separate Account
1-A(3)(a) Distribution Agreement between FKLA and Investors Brokerage
Services, Inc.
*1-A(3)(b)(i) Specimen Selling Group Agreement of Kemper Financial Services,
Inc. and FKLA General Agent Agreement
1-A(3)(b)(ii) Addendum to Selling Group Agreement of Kemper Financial
Services, Inc.
1-A(3)(c) Schedules of commissions
1-A(5) Specimen Policy
*1-A(6)(a) FKLA Articles of Incorporation
*1-A(6)(b) By-Laws of FKLA
1-A(10) Application for Policy
3(a) Opinion and consent of legal officer of FKLA as to legality of
policies being registered
3(b) Opinion and consent of actuarial officer of FKLA regarding
prospectus illustrations and actuarial matters
6(a) Consent of independent auditors
8 Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(iii)
*11 Representations, description and undertakings regarding
mortality and expense risk charge, pursuant to Rule
6e-3(T)(b)(13)(iii)(F)
</TABLE>
-------------------------
* Filed with the Registration Statement of the Registrant on Form S-6 filed on
June 3, 1994.
II-2
<PAGE> 67
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
FKLA Variable Separate Account, has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Long Grove and State of Illinois on the 17th day
of February, 1995.
FKLA VARIABLE SEPARATE ACCOUNT
(Registrant)
By: Federal Kemper Life Assurance Company
(Depositor)
By: /s/ JOHN B. SCOTT
---------------------------------------
John B. Scott, Chairman, Chief
Executive
Officer and President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following directors
and principal officers of Federal Kemper Life Assurance Company in the
capacities indicated on the 17th day of February, 1995
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------------------------------------------- ---------------------------------------------
<S> <C>
/s/ JOHN B. SCOTT Chairman, Chief Executive Officer, President
--------------------------------------------- and Director (Principal Executive Officer)
John B. Scott
/s/ JOHN H. FITZPATRICK Vice President and Director
--------------------------------------------- (Principal Financial Officer)
John H. Fitzpatrick
/s/ JAMES R. BORIS Director
---------------------------------------------
James R. Boris
/s/ DAVID B. MATHIS Director
---------------------------------------------
David B. Mathis
/s/ STEPHEN B. TIMBERS Director
---------------------------------------------
Stephen B. Timbers
/s/ JOSEPH R. SITAR Principal Accounting Officer
---------------------------------------------
Joseph R. Sitar
</TABLE>
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER TITLE PAGES
------ ------------------------------------------------------------------- ----------
<S> <C> <C>
1-A(3)(a) Distribution Agreement between FKLA and Investors Brokerage
Services, Inc.
1-A(3)(b)(ii) Addendum to selling group agreement of Kemper Financial Services,
Inc.
1-A(3)(c) Schedule of commissions
1-A(5) Specimen Policy
1-A(10) Application for Policy
3(a) Opinion and consent of legal officer of FKLA as to legality of
policies being registered
3(b) Opinion and consent of actuarial officer of FKLA regarding
prospectus illustrations and actuarial matters
6(a) Consent of independent auditors
8 Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(iii)
</TABLE>
<PAGE> 1
EXHIBIT 1-A(3)(a)
DISTRIBUTION AGREEMENT
BETWEEN
FEDERAL KEMPER LIFE ASSURANCE COMPANY
AND
INVESTORS BROKERAGE SERVICES, INC.
THIS AGREEMENT is made on this day of , 19 between FEDERAL
KEMPER LIFE ASSURANCE COMPANY ("FKLA"), on its own behalf and on behalf of the
FKLA Variable Separate Account (the "Account") and INVESTORS BROKERAGE
SERVICES, INC. ("IBS"). In consideration of the mutual covenants contained in
this Agreement, the parties agree as follows:
1. FKLA appoints IBS to promote the sale of variable life insurance
policies ("Policies") issued by FKLA and the Account. IBS will promote such
Policies in those states in which FKLA has variable policy authority and in
which the Policies are eligible for sale under applicable state law. FKLA
agrees to inform IBS of the status of such matters in each of these states from
time to time.
2. The solicitation of Policies shall be made by persons who are
registered representatives of National Association of Securities Dealers, Inc.
("NASD") member broker-dealers who have a Selling Group Agreement with IBS,
which agreement shall encompass the promotion of the sale of the Policies;
provided that, no such registered representative shall be allowed to
participate in the solicitation of the Policies unless such person has been
appointed to solicit variable policies by FKLA in any state in which such
solicitation may occur.
3. All books and records maintained by FKLA in connection with the sale of
Policies will be maintained and preserved by FKLA in conformity with the
requirements of Rule 17a-3 and 17a-4 under the Securities Exchange Act of 1934,
to the extent that such requirements are applicable to the Policies.
4. FKLA assumes full responsibility for the activities of all persons
engaged directly or indirectly in the promotion of the solicitation of the
Policies, including all sales representatives and associated persons as defined
in the Securities Exchange Act of 1934. IBS shall, in the course of
contracting with NASD member broker-dealers with which it has agreements,
require that such broker-dealers be responsible for the acts of their
registered representatives and associated persons.
5. Compensation to broker-dealers for the sale of Policies shall be paid
by FKLA through IBS. Any obligation by IBS to pay such compensation will occur
only following receipt of such amounts by IBS from FKLA.
6. IBS, when requested by FKLA, shall suspend its efforts to effectuate
sales of the Policies at any time FKLA shall request.
7. FKLA shall bear the expenses of printing and distributing registration
statements and prospectuses relating to the public sale of Policies pursuant to
this Agreement. FKLA agrees to bear the expenses of qualification of the
Policies for sale and of continuing the qualification in the various states.
FKLA shall bear the expenses of any sales literature used by IBS or furnished
by IBS to dealers in connection with offering the Policies and the expenses of
advertising in connection with such offerings, except for customized pieces the
cost of which shall be mutually agreed to by FKLA and IBS.
<PAGE> 2
8. IBS agrees that it will not use any sales material as defined
under the rules of the NASD or by the statutes or regulations of any state in
which the Policies may be solicited, unless such material has received prior
written approval by FKLA.
9. IBS, FKLA and the Account shall each comply with all applicable
provisions of the Investment Company Act of 1940, Securities Act of 1933 and of
all Federal and state securities and insurance laws, rules and regulations
governing the issuance and sale of the Policies.
10. FKLA agrees to indemnify IBS against any and all claims, liabilities
and expenses including but not limited to reasonable attorneys fees which IBS
may incur under the Investment Company Act of 1940, Securities Act of 1933 and
all Federal and state securities and insurance laws, rules and regulations
governing the issuance and sale of the Policies, common law or otherwise,
arising out of or based upon any alleged untrue statements of material fact
contained in any registration statement or prospectus of the Account, or any
alleged omission to state a material fact therein, the omission of which makes
any statement contained therein misleading or of any alleged act or omission in
connection with the offering, sale or distribution of the Policies by any
registered representatives or associated persons of a NASD member broker-dealer
which has an agreement with IBS. IBS agrees to indemnify FKLA and the Account
against any and all claims, demands, liabilities and expenses, including but
not limited to reasonable attorneys fees, which FKLA or the Account may incur,
arising out of or based upon any act of IBS or of any registered representative
of an NASD member investment dealer which has an agreement with IBS and is
acting in accordance with FKLA's instructions. FKLA acknowledges that IBS may
similarly attempt to hold such an NASD member broker-dealer responsible for the
acts of registered representatives and associated persons; and to the extent
FKLA is obligated to indemnify IBS under this Agreement, IBS agrees to assign
its rights against such broker-dealers to FKLA.
11. FKLA agrees to supply IBS with such information as may be reasonably
required by IBS including the "net accumulation unit value" computed as of the
time prescribed by and in compliance with all pertinent requirements of the
NASD and the Securities and Exchange Commission.
<PAGE> 3
12. This Agreement shall be effective February 1, 1995. This Agreement is
subject to termination by either party upon thirty (30) days' prior written
notice to the other party. This Agreement may not be assigned by either party
without the written consent of the other party. This Agreement shall be
interpreted according to the laws of the State of Illinois.
IN WITNESS WHEREOF, this Agreement has been signed by the parties on the date
first above written.
FEDERAL KEMPER LIFE ASSURANCE COMPANY
ATTEST: BY:
Title:
______________________________
Title:
INVESTORS BROKERAGE SERVICES, INC.
ATTEST: BY:
Title:
______________________________
Title:
<PAGE> 1
EXHIBIT 1-A(3)(b)
ADDENDUM TO
KEMPER FINANCIAL SERVICES, INC.
SELLING GROUP AGREEMENT
BY TRANSFER TO
KEMPER DISTRIBUTORS, INC. AND
INVESTORS BROKERAGE SERVICES, INC.
Your Selling Group Agreement with Kemper Financial Services, Inc. ("KFS") for
the distribution of shares of the Kemper Mutual Funds (the "Funds") and the
Kemper Life Insurance Companies ("KLIC") variable insurance contracts (the
"Variable Contracts") is hereby amended as follows. On February 1, 1995, KFS
will transfer its rights and obligations for the distribution of Shares of the
Funds under your Selling Group Agreement to Kemper Distributors, Inc. ("KDI")
and for the distribution of the Variable Contracts to Investors Brokerage
Services, Inc. ("IBS"). KDI, a wholly-owned subsidiary of KFS, will become the
principal underwriter and distributor of the Funds. IBS, a wholly-owned
subsidiary of Kemper Investors Life Insurance Company, will become principal
underwriter and distributor of the Variable Contracts.
This transfer does not otherwise affect your rights and obligations under the
Selling Group Agreement.
Questions relating to this Addendum should be directed to our Dealer File
Department at 1-800-621- 1048, ext. 6889. For information related to Kemper
Variable Contracts, call the KLIC Licensing and Contracting Department at
1-800-554-5426, ext. 5267.
KEMPER FINANCIAL SERVICES, INC.
KEMPER DISTRIBUTORS, INC.
INVESTORS BROKERAGE SERVICES, INC.
Date: January 11, 1995
<PAGE> 1
EXHIBIT 1-A(3)(c)
SCHEDULE OF COMMISSIONS
You (the "Agent"/"Agency") will be paid commissions, if payable on premiums
paid to the Company, excluding policy fees, and 1st year extra premium on PRO
term, according to the following schedule as full compensation for services
rendered by you. Any amounts paid directly to your Agents or Brokers shall be
offset against amounts payable below. This schedule shall be effective as of
March 1995.
Commission Percentages
<TABLE>
<CAPTION>
FKLA VUL First Year Years 2-5 Years 6+
--------------------------------------------------------------------
<S> <C> <C> <C>
Target 10% 6% 3%
Excess 6% 6% 3%
Service Fee* 0 .10% .10%
</TABLE>
*Service Fee Commission requires a minimum threshold of $100,000.00
under management.
<PAGE> 1
EXHIBIT 1-(A)(5)
Policy Form No. S-4050
FEDERAL KEMPER LIFE ASSURANCE COMPANY
A Stock Life Insurance Company
Long Grove, IL 60049
INITIAL DATE POLICY NUMBER FACE AMOUNT
Insured
Issue Age
Policy Date
Policy Number
Initial Specified
Issue Date
Amount
RIGHT TO CANCEL
This policy may be returned to us within 20 days of the time you receive it. It
may be mailed or delivered to us or to the agent who sold it. Upon our receipt,
this policy will be deemed void from the beginning. The Cash Value of the
policy plus any monthly deductions and any deductions made against premiums
will be refunded within seven days of our receipt of a notice of cancellation
and the return of this policy. This amount will be at least equal to the
premiums paid.
On the Maturity Date, if the insured is living and this policy is in force, we
will pay the Surrender Value to you. If the insured dies prior to the Maturity
Date and this policy is in force, we will pay to the beneficiary the death
benefit in force at the time of the insured's death. Payment made to you or to
the beneficiary will be made subject to the terms of this policy.
This policy is issued in consideration of the attached application(s) and
payment of the Initial Premium. The terms on this and the following pages are
part of this policy.
Signed for the Federal Kemper Life Assurance Company at its home office in Long
Grove, Illinois.
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MATURES AT THE INSURED'S ATTAINED AGE 100
NON-PARTICIPATING &LU.&LU. NO ANNUAL DIVIDENDS
TO THE EXTENT ALLOCATIONS ARE MADE TO THE SUBACCOUNTS, THE CASH VALUE
IS BASED ON THE INVESTMENT EXPERIENCE OF THE SUBACCOUNTS AND MAY
INCREASE OR DECREASE DAILY. THIS AMOUNT IS NOT GUARANTEED. THE AMOUNTS, OR
DURATION OF THE DEATH BENEFIT MAY VARY UNDER THE CONDITIONS DESCRIBED IN THE
DEATH BENEFIT AND TERMINATION PROVISIONS.
This policy is a legal contract between you and us.
READ YOUR POLICY CAREFULLY.
INDEX
Page No.
Death Benefit Provisions 8
Definitions 5 General Account Provisions 10
General Provisions 6-7
Nonforfeiture Provisions 12
Policy Loan Provisions 13-14
<PAGE> 2
Premium Provisions 9
Settlement Option Table follows page 16
Settlement Provisions 15-16
Surrender Value Provisions 14
Transfer Provisions 13
Transfer, Withdrawal, Loan and Surrender Procedures 15
Variable Account Provisions 10-12
Withdrawal Provisions 13
Additional Benefits, if any, listed in the Policy Specifications are described
in the additional benefit agreements that follow the Settlement Option Table.
DEFINITION SECTION
Accumulation Unit: An accounting unit of measure used to calculate the value of
each subaccount.
Cash Value: The Cash Value of this policy is the sum of the subaccount values
of the Separate Account plus the fixed account value and loan account value.
Debt: The principal of any outstanding loan under this policy plus any loan
interest due or accrued.
Fund: An investment company or separate series thereof, in which the
subaccounts of the Separate Account invest.
General Account: Our assets other than those allocated to the Separate Account
or any other Separate Account.
Issue Age: The insured's age as of his or her last birthday on the Policy Date.
Maturity Date: The Maturity Date is stated in the Policy Specifications. It is
the policy anniversary following the insured's 99th birthday.
Monthly Processing Date: The Monthly Processing Date is stated in the Policy
Specifications. It is the same day in each month as the Policy Date. It is the
day from which policy months are determined.
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.
Policy Date, Policy Year: The Policy Date is stated in the Policy
Specifications. It is used to determine Policy Years and Monthly Processing
Dates. Subsequent Policy Years will start on anniversaries of the Policy Date.
Premium: A dollar amount received by us in U.S. Currency as consideration for
the benefits to be provided under this policy.
Premium Charges: The percentage of premium charges that are deducted from the
premium before the premium is allocated to the subaccounts or the fixed
account.
Separate Account: A unit investment trust registered with the Securities and
Exchange Commission under the Investment Company Act of 1940 known as the FKLA
Variable Separate Account.
Separate Account Value: On any Valuation Date the separate account value of
this policy is the sum of its subaccount values.
Subaccounts: The Separate Account has several subaccounts. The
<PAGE> 3
subaccounts available under this policy are stated in the Policy Specifications.
Subaccount Value: Each subaccount will be valued separately as determined by
the formula stated in this policy.
Surrender Value: The Surrender Value of this policy is the Cash Value on the
date of surrender minus: 1. any applicable surrender charge; and 2. any Debt.
Trade Date: The Trade Date is 30 days following the Issue Date of this policy.
It is the date that the money market subaccount value will be allocated to the
subaccounts and the fixed account according to your allocation.
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.
We, Our, Ours, Us: Federal Kemper Life Assurance Company
You, Your, Yours: The party(s) named as owner in the application unless later
changed as provided in this policy.
GENERAL PROVISIONS
The Contract
This policy, the attached application and any supplemental application(s) form
the entire contract. All statements made in the application and any
supplemental application(s) are representations and not warranties unless fraud
is involved. In addition to other reasons permitted by law, the validity of
this policy can be contested if any material misrepresentations of fact is made
in the application, a supplementary application or a request. No statement will
void this policy or be used to deny a claim unless it is contained in an
attached application or supplemental application.
Modification of Policy
Only our president, secretary or assistant secretaries have power to approve a
change in or waive the provisions of this policy. No agent or person other
than such officers can change or waive the terms of this policy.
Ownership of Policy
Unless otherwise provided in the application, the insured is the original
policy owner. You have the exclusive right to cancel or amend this policy by
agreement with us and exercise every option and right conferred by this policy,
including the right of assignment. We reserve the right to require the return
of this policy for endorsement for any change.
Change of Ownership
Ownership may be changed during the lifetime of the insured by written notice
from you in a form satisfactory to us. After we receive written notice at our
home office, the change will take effect as of the date the notice was signed.
The change, however, will
<PAGE> 4
not apply to any payment made or action taken by us before the notice was
received.
Effective Date of Coverage
The effective date of coverage under this policy is the Policy Date. The Issue
Date is the same date as the Policy Date unless a different Issue Date is
stated in the Policy Specifications. Incontestability and suicide periods are
measured from the Issue Date.
Termination
All coverage under this policy terminates when any one of the following events
occurs: 1. you request that coverage terminate; 2. the insured dies; 3. this
policy matures; or 4. the grace period ends.
Contestability
This 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 each increase in insurance
beginning with the effective date of each increase and will apply only to
statements made in the application for the increase.
If the policy is reinstated, a new two year contestability period will apply
from the effective date of the reinstatement and will apply only to statements
made in the application for the reinstatement.
Misstatement of Age and/or Sex
If the age and/or sex of the insured was misstated, the death benefit will be
adjusted based on what the cost of insurance charged for the most recent
Monthly Processing Date, prior to the insured's death, would have purchased
using the correct age and/or sex.
Suicide
If the insured dies by suicide, while sane or insane, within two years from the
Issue Date, the death benefit proceeds will be limited to the premiums paid
less any withdrawals and Debt.
If the insured dies by suicide, while sane or insane, within two years of any
increase in insurance, or any reinstatement, our total liability with respect
to such increase or reinstatement will be the cost of insurance.
Due Proof of Death
Upon the death of the insured, written proof of death in the form of a
certified copy of the death certificate, a written physician's statement or any
other proof satisfactory to us is required within sixty days of such death or
as soon thereafter as is reasonably possible.
Beneficiary Designation and Change of Beneficiary
The original beneficiary is named in the application for this policy. If a
beneficiary is not named, the original beneficiary is the estate of the
insured. You may change the beneficiary by filing a written change with us
subject to the following:
<PAGE> 5
1. The change must be filed during the insured's lifetime;
2. This policy must be in force at the time a change is filed;
3. Such change must not be prohibited by the terms of an existing:
assignment, beneficiary designation, or other restriction;
4. Such change will take effect when we receive it at our home office;
5. After we receive the request, the change will take effect as of the date the
request for change was signed; however, action taken by us before such request
was received will remain valid.
6. The request for change must provide information to identify the new
beneficiary.
Death of Beneficiary
The interest of a beneficiary who dies before the insured will pass to the
other beneficiaries, if any, share and share alike, unless otherwise provided
in the beneficiary designation. If no beneficiary survives the insured, the
proceeds of this policy will be paid to the insured's estate.
If a beneficiary dies within ten days of the insured's death, proceeds of this
policy will be paid as if the insured had survived that beneficiary.
Assignment
No assignment of this policy is binding on us until it is received by us at our
home office. We assume no responsibility for the validity of any assignment.
Any claim under an assignment is subject to proof of the extent of the interest
of the assignee. Your rights and the rights of the beneficiary are subject to
the rights of the assignee of record.
Non-Participating
This policy will not pay dividends. It will not participate in any of our
surplus earnings.
Reports
At least once each Policy Year we will send you a report. The report will show
the premiums paid, investment experience and charges made since the last
report. The report will also show the current death benefit and Cash Value as
well as any other information required by statute.
Reserves, Cash Value and Death Benefit
All reserves are greater than or equal to those required by statute. Any Cash
Value and death benefit available under this policy are at least equal to the
minimum benefits required by the statutes of the state in which this policy is
delivered.
Basis of Computations
A detailed statement of the method of computation of Cash Value under this
policy has been filed with the insurance department of the state in which this
policy is delivered. The 1980 Commissioner's Standard Ordinary Smoker and
Nonsmoker Mortality Tables, age last birthday, is the basis for minimum Cash
Values, death benefits and guaranteed maximum cost of insurance rates under
this policy.
Tax Treatment
This policy is intended to qualify as a life insurance policy under the
<PAGE> 6
Internal Revenue Code ("Code"). We may return premiums which would disqualify
the policy from tax treatment as a life insurance policy. This policy may be
endorsed to reflect any change in the Code and its regulations or rulings. You
will receive a copy of any such endorsement.
Currently, no charges are made against the Separate Account for federal, state
or other taxes that may be attributed to the Separate Account. We may in the
future, however, impose charges for federal income taxes attributed to the
Separate Account. Charges for other taxes, if any, attributed to this policy
may also be made.
DEATH BENEFIT PROVISIONS
Death Benefit
The death benefit is based on the Specified Amount, the Death Benefit Option
and the Table of Death Benefit Factors applicable at the time of death. The
Initial Specified Amount, the Death Benefit Option and the Table of Death
Benefit Factors are shown in the Policy Specifications.
Specified Amount
The Specified Amount is the Initial Specified Amount shown on the Policy
Specifications, unless changed in accordance with the Changes provision or
reduced by a cash withdrawal.
Death Benefit Option
The Death Benefit Option is shown on the Policy Specifications, unless changed
in accordance with the Changes provision.
If Option A is in effect, the death benefit is the greater of:
1. the Specified Amount; or
2. the Table of Death Benefit Factors times the Cash Value of this policy on
the date of the insured's death.
If Option B is in effect, the death benefit is the greater of:
1. the Specified Amount plus the Cash Value of this policy on the date of the
insured's death; or
2. the Table of Death Benefit Factors times the Cash Value of this policy on
the date of the insured's death.
Changes
You may change the Death Benefit Option after the first Policy Year. The
Specified Amount will be changed as follows:
1. If the change is from Option A to Option B, the Specified Amount after such
change will be:
a. the Specified Amount prior to such change; minus
b. the Cash Value on the date of the change.
2. If the change is from Option B to Option A, the Specified Amount after such
change will be:
a. the Specified Amount prior to such change; plus
b. the Cash Value on the date of the change.
You may increase the Specified Amount after the first Policy Year and prior to
the insured's attained age 85. You may also decrease the Specified Amount after
the first Policy Year. The change is subject to the following:
1. Any such decrease will reduce the insurance in the following order:
<PAGE> 7
a. the most recent increase first,
b. any other increases in the reverse order in which they occurred; and
c. finally, against the Initial Specified Amount.
2. Any request for an increase must be applied for on a supplemental
application.
The request for a change must be in writing. No more than one change will be
allowed in any Policy Year. The change will be effective on the first Monthly
Processing Date on or after the day we receive the request. No changes will be
allowed if the resulting Specified Amount would be less than the lesser of the
Initial Specified Amount or the Minimum Specified Amount or if this policy
would be disqualified as life insurance under the Code. The Initial Specified
Amount and the Minimum Specified Amount are shown on the Policy Specifications.
Payment of the
Death Benefit
Death benefits will be paid following receipt by us at our home office of due
proof that the insured died while this policy was in force. The death benefit
will be determined based upon the date of death. The return of this policy is
required before a payment is made.
The death benefit proceeds will be equal to:
1. the death benefit; minus
2. any monthly deductions due during the grace period; minus
3. any Debt.
PREMIUM PROVISIONS
Initial Premium
The Initial Premium is shown in the Policy Specifications. It is payable to us
or to an authorized agent on or before delivery of this policy.
Additional Premiums
The amount and frequency of Planned Periodic Premium are shown on the Policy
Specifications. The amount and frequency can be changed upon request, subject
to our approval.
While this policy is in force, additional premiums may be paid at any time
prior to the Maturity Date. We reserve the right to limit or refund any premium
if:
1. the amount of the premium is below our current minimum premium amount
requirement; or
2. the premium would increase the death benefit by more than the amount of the
premium; or
3. the premium would disqualify this policy as life insurance under the Code.
Net Premiums
The net premium equals the premium paid less the premium charges shown in the
Policy Specifications.
Premium Allocation
The Initial Premiums will be allocated to the money market subaccount. On the
first Valuation Date on or
<PAGE> 8
following the Trade Date, the money market
subaccount value will be allocated to the subaccounts and the fixed account in
accordance with the intial premium allocation as shown in the Policy
Specifications. Any net premiums received after the Trade Date will be
allocated to the subaccounts and the fixed account on the first Valuation Date
on or following the date the premium is received in our home office in
accordance with the Initial Premium allocation as shown in the Policy
Specifications.
The premium allocation shown in the Policy Specifications may be changed by
you. The request for an allocation change must be in writing.
Grace Period
If the Surrender Value on the day immediately preceding a Monthly Processing
Date is less than the monthly deduction for the next month, a grace period of
61 days will be allowed for the payment, without evidence of insurability, of
premium payment or loan repayment equal to at least three monthly deductions.
This grace period will begin on the day we mail notice of the required payment
to your last known address.
If payment is not received within the grace period, all coverage under this
policy will terminate at the end of the grace period in accordance with the
nonforfeiture provisions. If death of the insured occurs within the grace
period, any amount payable will be reduced by any unpaid monthly deductions.
During the Guarantee Period, the policy will remain in force and no grace
period will begin provided the total premiums received, less any withdrawals
and any Debt, equals or exceeds the Monthly Guarantee Premium times the number
of months since the Policy Date, including the current month. The Guarantee
Period and Monthly Guarantee Premium are shown in the Policy Specifications.
Reinstatement
If this policy lapses because of insufficient Cash Value to cover the monthly
deduction, and has not been surrendered for its Surrender Value, it may be
reinstated at any time within five years after the date of lapse. The
reinstatement is subject to:
1. receipt of evidence of insurability satisfactory to us;
2. payment of a minimum premium sufficient to keep this policy in force for
three months; and
3. payment of any Debt against this policy which existed at the date of
termination of coverage.
The effective date of reinstatement of a policy will be the Monthly Processing
Date that coincides with or next follows the date the application for
reinstatement is approved by us.
The suicide and incontestability provisions will apply from the effective date
of reinstatement.
GENERAL ACCOUNT PROVISIONS
General Account
The guaranteed benefits under this policy are provided through our General
Account. The fixed account is the only account available to you in our General
Account.
Fixed Account
<PAGE> 9
The fixed account is credited with interest rate(s) which will not be less than
the guaranteed minimum interest rate. The guaranteed minimum interest rate is
3.00% per year compounded daily at the daily equivalent of a 3.00% annual
effective rate.
We may declare from time to time a current interest rate which is higher than
the guaranteed minimum interest rate. Each current interest rate will be
guaranteed until the next policy anniversary.
On each policy anniversary, we will also declare current interest rate(s) which
will apply to net premiums previously received, and the interest thereon. These
interest rate(s) will be guaranteed until the next policy anniversary.
Fixed Account Value
On any Valuation Date, the fixed account value is equal to:
1. the sum of all net premiums allocated to the fixed account; plus
2. any amounts transferred to the fixed account; plus
3. the total interest credited to the fixed account; minus
4. any pro-rata monthly deductions charged to the fixed account; minus
5. any amounts transferred from the fixed account; minus
6. any amounts withdrawn from the fixed account; minus
7. any amounts loaned from the fixed account.
VARIABLE ACCOUNT PROVISIONS
Separate Account
The variable benefits under this policy are provided through the FKLA Variable
Separate Account which is referred to in this policy as the "Separate Account".
The Separate Account is registered with the Securities and Exchange Commission
as a unit investment trust under the Investment Company Act of 1940. It is a
separate investment account maintained by us into which a portion of our assets
have been allocated for this policy and may be allocated for certain other
policies.
Liabilities of Separate Account
The assets equal to the reserves and other liabilities of the Separate Account
will not be charged with liabilities arising out of any other business we may
conduct.
If the assets of the Separate Account exceed the liabilities under the policies
supported by the Separate Account, then the excess may be used to cover the
liabilities of our General Account. The assets of the Separate Account will be
valued on each Valuation Date.
Subaccount Value
On any Valuation Date, the subaccount value in a subaccount equals:
1. the subaccount value on the previous Valuation Date multiplied by the
investment experience factor for the end of 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; minus
4. the pro-rata portion of any monthly deduction charged to the subaccount when
the Valuation Period includes a Monthly Processing Date; minus
5. any amounts transferred from the subaccount during the current
<PAGE> 10
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.
VARIABLE ACCOUNT PROVISIONS (Continued)
Fund
Each subaccount of the Separate Account will buy shares of a separate series of
the Kemper Investors Fund, or of another investment company or of a separate
series of another investment company offered as an investment alternative under
the policy. The Kemper Investors Fund is registered under the Investment
Company Act of 1940 as an open-end diversified management investment company.
Each series of the Kemper Investors Fund represents a separate investment
portfolio which corresponds to one of the subaccounts of the Separate Account.
If we establish additional subaccounts each new subaccount will invest in a new
series of the Kemper Investors Fund or in shares of another investment company.
We may also add and/or substitute other investment companies.
Change of Investment Adviser
or Investment Objectives
Unless otherwise required by law or regulation, the investment adviser or any
investment objective may not be changed without our consent. Any investment
objective will not be materially changed unless a statement of the change is
filed with and approved by the Insurance Commissioner of the State of Illinois.
If required, approval of or change of any investment objective will be filed
with the insurance department of the state where this policy is delivered.
Rights reserved by Us
We reserve the right, subject to compliance with the law as currently
applicable or subsequently changed:
1. to operate the Separate Account in any form permitted under the Investment
Company Act of 1940 or in any other form permitted by law;
2. to take any action necessary to comply with or obtain and continue any
exemptions from the Investment Company Act of 1940 or to comply with any other
applicable law;
3. to transfer any assets in any subaccount to another subaccount or to one or
more separate accounts, or our General Account; or to add, combine or remove
subaccounts in the Separate Account;
4. to delete the shares of any of the portfolios of the Fund or any other
open-end investment company and to substitute, for the Fund shares held in any
subaccount, the shares of another portfolio of the Fund or the shares of
another investment company or any other investment permitted by law; and
5. to change the way we assess charges, but without increasing the aggregate
amount beyond that currently charged to the Separate Account and the Fund in
connection with the policies.
When required by law, we will obtain your approval of such changes and the
approval of any regulatory authority.
Accumulation Unit Value
Each subaccount has an accumulation unit value. For each subaccount the
accumulation unit value was initially set at $1.00. When premiums or other
amounts are allocated to a subaccount, a number of units are
<PAGE> 11
purchased based on the subaccounts 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.
The accumulation unit value for each subsequent Valuation Period is the
investment experience factor for that period multiplied by the accumulation
unit value for the immediately preceding period. The accumulation unit value
for a Valuation Period applies to each day in such period. The number of
accumulation units will not change as a result of investment experience.
Investment Experience Factor
Each subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Cash Value in each subaccount during a Valuation
Period.
The investment experience factor of a subaccount for a Valuation Period is
determined by dividing 1. by 2. and subtracting 3. from the result, where:
1. is the net result of:
VARIABLE ACCOUNT PROVISIONS (continued)
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 to 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 last prior Valuation Period;
3. is the factor representing the Mortality and Expense Risk Charge.
NONFORFEITURE PROVISIONS
Cash Value
The Cash Value of this policy is equal to the sum of the subaccount values plus
the fixed account value plus the loan account value.
Monthly Deduction
On each Monthly Processing Date, a monthly deduction will be made equal to the
sum of the following:
1. the monthly cost of insurance charge for this policy; plus
2. the monthly charge for any supplemental benefits and riders; plus
3. the monthly administration charge.
The monthly deduction will be deducted from the subaccounts and the fixed
account in proportion to the value that each account bears to the separate
account value plus the fixed account value.
Cost of Insurance
The cost of insurance is determined on a monthly basis. The cost of insurance
charge is equal to the result of 1. minus 2. multiplied by
<PAGE> 12
3. where:
1. is the death benefit;
2. is the Cash Value; and
3. is the cost of insurance rate, as described in the cost of insurance rate
provision.
Cost of Insurance Rate
The monthly cost of insurance rate is based on the insured's sex, Issue Age,
and Rate Class. The cost of insurance rate will also vary by Policy Year. The
monthly cost of insurance rate will be determined by us based on our
expectations as to future mortality experience.
Any change in the cost of insurance rates will apply to all individuals of the
same sex, Issue Age, Rate Class and Policy Year. At no time will such rate ever
be greater than those shown in the Table of Guaranteed Maximum Monthly Cost of
Insurance Rates, shown in the Policy Specifications, multiplied by a Rate Class
percent. These rates are based on the 1980 Commissioner's Standard Ordinary
Smoker and Nonsmoker Mortality Tables, age last birthday.
Supplemental Benefits and Riders
The monthly charges for any supplemental benefits and riders are shown on the
Policy Specifications.
Administration Charge
The monthly administration charge is shown on the Policy Specifications.
Insufficient Cash Value
This policy will terminate as provided in the grace period provision if the
Surrender Value on the date immediately preceding a Monthly Processing Date is:
1. insufficient to cover the monthly deduction for the month following such
Monthly Processing Date; and
2. no premium payment or loan payment sufficient to cover at least three
monthly deductions is received before the end of the grace period.
Any deduction for the cost of insurance or other benefits and riders after
termination of insurance will not be considered a reinstatement of this policy
or a waiver by us of the termination.
TRANSFER PROVISIONS
Transfers
You may transfer all or part of the value of each subaccount at any time to
another subaccount subject to the following conditions:
1. transfers are not permitted until after the Trade Date. Thereafter, one
transfer will be permitted in each fifteen day period. All transfers which
occur during one business day will be considered one transfer;
2. the minimum amount which may be transferred is $500.00 or, if smaller, the
remaining value of this policy's interest in a subaccount; and
3. no partial transfer will be made if your remaining subaccount value will be
less than $500.00 after such transfer unless this policy's interest in such
subaccount is eliminated by means of such transfer.
<PAGE> 13
You may also transfer all or a part of the fixed account value to any
subaccount subject to the following conditions:
1. transfers are not permitted until after the Trade Date. Thereafter, one
transfer will be permitted each Policy Year during the thirty days that follow
a policy anniversary or the thirty day period that follows the date you receive
an annual report, if later.
2. the minimum amount which may be transferred is $500.00 or, if smaller, the
remaining fixed account value.
3. no partial transfer will be made if your remaining fixed account value will
be less than $500.00 after such transfer unless this policy's fixed account
value is eliminated by means of such transfer.
We reserve the right at any time and without prior notice to any party to
terminate, suspend or modify the transfer provision described above. We also
reserve the right to charge up to $25 for each transfer.
Any transfer direction must clearly specify the amount which is to be
transferred and the names of the accounts which are to be affected. A telephone
transfer direction will be honored by us only if a properly executed telephone
transfer authorization is on file with us, and if such transfer direction
complies with the authorization's conditions and our administrative procedures.
WITHDRAWAL PROVISIONS
Withdrawal
Cash withdrawals may be made any time after the Trade Date. The minimum
withdrawal amount is shown on the Policy Specifications. There is a charge for
each withdrawal. The withdrawal charge is also shown on the Policy
Specifications. During the surrender charge period, withdrawals may also be
assessed a surrender charge. However, withdrawals made from the Cash Value in
excess of the total premiums paid into the policy are free of surrender
charges. In calculating the total premiums paid into the policy, previous
withdrawals assessed a surrender charge will reduce the amount of premiums
considered to be paid into the policy. You must specify the accounts from which
the withdrawal is to be made.
Effect of a Withdrawal
The Cash Value will be reduced by the amount of the withdrawal. If Death
Benefit Option A is in effect, the Specified Amount will also be reduced by the
amount of the withdrawal.
POLICY LOAN PROVISIONS
Policy Loans
Policy loans may be made any time after the Trade Date. We will lend up to a
maximum loan amount of 95% of this policy's Cash Value less any applicable
surrender charges. The amount of any new loan may not exceed the maximum loan
amount less Debt on the date the loan is granted. The minimum amount of a loan
is $500.
POLICY LOAN PROVISIONS (continued)
On the date the loan is made, an amount equal to the loan will be transferred
from the subaccounts and the fixed account to the loan account held in the
General Account until the loan is repaid. Unless directed otherwise, the loaned
amount will be deducted from the subaccounts and the fixed account in
proportion to the values that
<PAGE> 14
each account bears to the separate account value
plus the fixed account value.
Should the Debt equal or exceed the Cash Value less surrender charge, this
policy will terminate 61 days after notice has been mailed to you at your last
known address.
Cash Values derived from premium received by us in the form of a check or draft
will not be available for loans until 30 days after deposit of such check or
draft.
Policy Loan Interest
The loan interest rate will be 5.00% per year. Interest will be compounded
daily at the daily equivalent of the above annual interest rates. Interest not
paid will be charged on a daily basis and will be added to the Debt on this
policy and bear interest at the same rate.
During the existence of a loan, the loan account value will earn 3.00% per year
during the first nine Policy Years and 5.00% per year thereafter. Interest will
be earned on a daily basis and will be added to the loan account.
Policy Loan Repayment
A Debt may be repaid in full or in part at any time while this policy is in
force.
As Debt is paid, the loan account value equal to the amount of repayment which
exceeds the difference between interest due and interest earned will be
allocated to the subaccounts and the fixed account according to the then
current premium allocation instructions.
Effect of Policy Loans
The Debt on this policy, along with the surrender charge, will reduce the
amount of Cash Value payable upon surrender. The Debt on this policy will also
reduce the amount of Cash Value available for withdrawal. The death benefit
payable to the beneficiary upon the death of the insured will also be reduced
by the amount of Debt.
SURRENDER VALUE PROVISIONS
Surrender
This policy may be surrendered for its Surrender Value upon written request by
you and return of this policy to us at our home office. The request must be
made during the lifetime of the insured and while this policy is in force. The
return of this policy is required before the Surrender Value is paid.
Payment of the Surrender Value will discharge us from our obligations under
this policy. A surrender may subject the amount surrendered to a surrender
charge.
We will pay the Surrender Value of this policy to you on the Maturity Date if
the insured is living and this policy is in force.
Surrender Charge
During the first nine Policy Years a surrender charge will be assessed if this
policy is surrendered or if the Cash Value is applied for under a settlement
option. However, a surrender charge will not be assessed against Cash Values
applied under a settlement option if this policy has been in force for five or
more years and the settlement option
<PAGE> 15
elected provides for the payment of benefits for at least five years.
The surrender charge is a percentage of the total premiums paid to date. The
applicable percentage is shown in the Surrender Charge Table below.
SURRENDER CHARGE TABLE
<TABLE>
<CAPTION>
Policy Year 1 2 3 4 5 6 7 8 9 10 & Later
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surrender 6% 6% 6% 6% 6% 5% 4% 3% 2% 0
Charge
</TABLE>
TRANSFER, WITHDRAWAL, LOAN AND SURRENDER PROCEDURES
A transfer, withdrawal, loan or surrender will be effective at the end of the
Valuation Period following a telephone transfer direction or receipt by us at
our home office of a written request which contains all required information.
Accumulation units will be redeemed to the extent necessary to achieve the
dollar amount of the transfer, withdrawal, loan or surrender. The accumulation
units credited in each subaccount will be reduced by the number of accumulation
units redeemed. The reduction in the number of accumulation units will be
determined on the basis of the accumulation unit value at the end of the
Valuation Period during which the request containing all required information
is received by us. An amount withdrawn, loaned or surrendered from the
subaccounts will be paid within seven calendar days after the date proper
written election is received by us unless: 1. the New York Stock Exchange is
closed (other than customary weekend and holiday closings); 2. trading in the
markets normally utilized is restricted, or an emergency exists as determined
by the Securities and Exchange Commission, so that disposal of investments or
determination of the valuation unit is not reasonably practicable; or 3. such
other periods as defined by the Securities and Exchange Commission for the
protection of owners.
If the withdrawal, loan or surrender is to be made from the fixed account, we
may defer the payment for a period permitted by law, but not more than six
months after the written request is received by us. During the period of
deferral, interest at the then current interest rate will continue to be
credited to the fixed account value.
SETTLEMENT PROVISIONS
Settlement Options
Instead of us paying all of the death benefit or Surrender Value of this policy
due in one sum, amounts may be applied under one of the following settlement
options.
Payments under these options will not be affected by the investment experience
of any Separate Account after proceeds are applied under a settlement option.
Payments must be made to a natural person in his own right, referred to below
as "payee". Payment will be made as elected on a monthly, quarterly,
semi-annual or annual basis.
The option selected must result in a payment that is at least equal to our
minimum payment, according to our rules, in effect at the time the settlement
option is chosen. If at any time the payments are less than the minimum
payment, we have the right to increase the period between
<PAGE> 16
payments to quarterly, semi-annual or annual or to make the payment in one
lump sum so that the payment is at least equal to our minimum payment.
Election of Settlement Option
Election of a settlement option may be made by written notice to us. This
election may be made:
1. by you during the lifetime of the insured;
2. by the beneficiary if no election made by you is in effect at the time of
the death of the insured; or
3. by the beneficiary if you reserve the right to the beneficiary to change an
election upon the death of the insured. Such change must be made prior to the
first settlement option payment.
An election in effect during the lifetime of the insured will be revoked by a
subsequent change of beneficiary or an assignment of this policy, unless
provided otherwise.
SETTLEMENT PROVISIONS (continued)
General Conditions
The Cash Value on the day immediately preceding the date on which the first
benefit payment is due will be first reduced by any applicable surrender charge
and Debt. The remaining value will be used to determine the monthly benefit
payment. The monthly benefit payment will be based upon the settlement option
elected in accordance with the appropriate Settlement Option Table.
Option 1 - Fixed Instalment Annuity
We will pay a monthly income for the period elected but not less than 5 years
nor more than 30 years.
Option 2 - Life Annuity
We will pay a monthly income to the payee during the payee's lifetime.
Option 3 - Life Annuity with Instalments Guaranteed
We will pay a monthly income for the Guaranteed Period elected and thereafter
for the remaining lifetime of the payee. The period elected may be 5, 10, 15 or
20 years.
Option 4 - Joint and Survivor Annuity
We will pay the full monthly income while both payees are living. Upon the
death of either payee, the income will continue during the lifetime of the
surviving payee. The surviving payee's income will be the percentage of such
full amount chosen at the time of election of this option. The percentages
available are 50%, 66 2/3%, 75% and 100%.
Other Settlement Arrangements
May be available with our consent.
Supplementary Contract
A supplementary contract will be issued to reflect payments to be made under a
settlement option. If settlement is a result of the death of the insured, its
effective date will be the date of death. Otherwise its effective date will be
the date chosen by you.
Date of First Payment
Interest under the settlement options will begin to accrue on the effective
date of the supplementary contract. If the normal effective date is the 29th,
30th or 31st of the month, the effective date will be
<PAGE> 17
the 28th day of that month.
Evidence of Age, Sex and Survival
We may require satisfactory evidence of the age and sex of any person on whose
life the income is to be based and the continued survival of any person on
whose life the income is based.
Basis of Settlement Options
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.
Disbursement of Funds upon Death of Payee
Under Options 1 or 3
At the death of the payee, any unpaid instalments will be paid in one lump sum
to the estate of the payee, unless otherwise provided in the supplementary
agreement. The lump sum will be equal to the commuted value of the remaining
instalments, based on a minimum interest rate of not less than 2.50%.
Protection of Benefits
Unless otherwise provided in the supplementary contract the payee may not: 1.
commute; 2. anticipate; 3. assign; 4. alienate; or 5. otherwise encumber any
payment to be received.
Creditors
The proceeds of the policy and any payment under an option will be exempt from
the claim of creditors and from legal process to the extent permitted by law.
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MATURES AT THE INSURED'S
ATTAINED AGE 100 NON-PARTICIPATING &LU.&LU. NO ANNUAL DIVIDENDS
This policy is a legal contract between you and us.
READ YOUR POLICY CAREFULLY.
FEDERAL KEMPER LIFE ASSURANCE COMPANY
A Stock Life Insurance Company
Long Grove, IL 60049
Policy Form No. S-4050
<PAGE> 1
FEDERAL KEMPER LIFE ASSURANCE COMPANY
FIDELITY LIFE ASSOCIATION, A Mutual Legal Reserve Company
Long Grove, IL 60049
EXHIBIT 1-A(10)
LIFE INSURANCE APPLICATION
<TABLE>
<S> <C>
COMPLETE THE FOLLOWING IN ALL CASES: THE FOLLOWING ARE NOT INCLUDED IN THIS SET
Part A: General Information (USE WHEN NEEDED):
Part B: Agreement Part G: Aviation Supplement
Agent's Report (located at end of set) Part H: Financial Supplement
COMPLETE THE FOLLOWING WHEN NEEDED: Part J: Insurance History Supplement
Part C: Medical Questionnaire (must be com-
pleted for all non-examined cases)
Part D: Multiple Insured Supplement
Part E: Additional Details
Pre-authorized Checking (PAC) Authorization
(if electronic debit is desired)
</TABLE>
--------------------------------------------------------------------------------
DIRECTIONS
You, as the Agent, are responsible for completing the necessary forms required
to process and underwrite this application. All forms must be completed in full
and must be legible. The directions below must be followed carefully.
<TABLE>
<S> <C>
DO -- DON'T --
-Submit separate applications on Joint -Don't accept or send money on applications
Insureds. totalling over $500,000.
- Provide full details. - Don't send partial premiums -- full mode
- Print applications in black ink. premium is needed.
- Get all required signatures. - Don't use pencil.
- Have the applicant initial all changes. - Don't use whiteout.
- Complete the Agent's Report, especially
Question 10 (regarding replacement
- Sign the Agent's Report after completing.
- Complete the Financial Supplement, Part H,
if the application is for more than $1
million.
-Give the Notification (below) to the
applicant prior to completion of the
application.
- Send two months' premium on all PAC cases.
</TABLE>
(Tear here)
--------------------------------------------------------------------------------
FEDERAL KEMPER LIFE ASSURANCE COMPANY
FIDELITY LIFE ASSOCIATION, A Mutual Legal Reserve Company
Long Grove, IL 60049
-- NOTIFICATION -- IMPORTANT INFORMATION -- PLEASE READ BOTH SIDES CAREFULLY --
FEDERAL FAIR CREDIT REPORTING ACT NOTICE
We may request a consumer report which contains information about your
character, reputation, and mode of living, except as may be related directly or
indirectly to your sexual orientation. The information is obtained through
interviews with your friends, neighbors, and associates. It is part of our
underwriting procedure. We will furnish information about the nature of the
report to you if you write to us and ask.
THIS NOTIFICATION MUST BE GIVEN TO THE PROPOSED INSURED BEFORE THE APPLICATION
IS COMPLETED.
<PAGE> 2
FEDERAL KEMPER LIFE ASSURANCE COMPANY
FIDELITY LIFE ASSOCIATION, A Mutual Legal Reserve Company
Long Grove, IL 60049
--------------------------------------------------------------------------------
CONDITIONAL RECEIPT (do not complete and give to Applicant unless payment is
made)
--------------------------------------------------------------------------------
In exchange for the payment of the first required premium with the application,
the Company will provide insurance prior to policy delivery, under the following
terms.
NO INSURANCE WILL BE PROVIDED UNDER THIS RECEIPT UNLESS ALL REQUIREMENTS ARE
FIRST FULFILLED EXACTLY DURING THE LIFETIME OF THE PROPOSED INSURED. IF ALL
REQUIREMENTS ARE NOT SO MET, OR THE PROPOSED INSURED DIES BY SUICIDE, THE
LIABILITY OF THE COMPANY SHALL BE LIMITED TO A REFUND TO THE APPLICANT OF THE
PAYMENT MADE FOR THIS RECEIPT. MEDICAL REQUIREMENTS ARE DEFINED BY THE COMPANY'S
CURRENT RULES AND PRACTICES AND INCLUDE HOSPITAL AND PHYSICIAN REPORTS, AND
MEDICAL EXAMINATIONS AND TESTS. NO AGENT MAY ALTER OR WAIVE ANY PART OF THIS
RECEIPT. THIS RECEIPT PROVIDES NO INSURANCE FOR RIDERS OR ADDITIONAL BENEFITS.
REQUIREMENTS -- The following must first be fulfilled for insurance to start:
a. All medical requirements are completed and received by the Company within 60
days from the date of the application;
b. The first premium has been paid in full;
c. All questions in the application have been answered;
d. All answers given in the application are true and complete;
e. The Proposed Insured is acceptable to the Company under its rules and
practices, for the plan and amount applied for, without amendment, at the
rate class applied for or a lesser premium, as of the date the Company
receives all of its medical requirements; and
f. The Proposed Insured has complied with all parts of Life Application -- Part
B: Agreement.
START OF ISSUANCE -- If the above requirements are first met, this Receipt will
provide insurance beginning the latest of: (1) the date of the application; or
(2) the date of receipt of all medical requirements by the Company.
END OF INSURANCE -- Once begun, any insurance this receipt may provide ends at
the earliest of: (1) 60 days after the date of the application; (2) when the
Company sends a refund of the premium which was exchanged for this receipt; or,
(3) the date any policy issued goes into effect.
AMOUNT LIMIT -- The amount of insurance provided by this receipt is the lesser
of: (a) the initial death benefit of the insurance applied for in the
application; or (b) $500,000.
PAYMENT TERMS -- The first premium will not be considered paid unless any check,
draft, or other instrument of payment (given as premium) is paid in accordance
with its terms. ALL PREMIUM CHECKS MUST BE MADE PAYABLE TO THE COMPANY. DO NOT
MAKE CHECKS PAYABLE TO THE AGENT. DO NOT LEAVE THE PAYEE BLANK.
--------------------------------------------------------------------------------
This receipt is given on behalf of the company selected in item 8 of Part A of
the application.
I have read and agree to the above terms.
<TABLE>
<S> <C>
------------------------- --------------------------------------------------------------------
Dated Signature of the Owner/Applicant
</TABLE>
Received from $
for coverage on (the Proposed Insured)
<PAGE> 3
<TABLE>
<S> <C>
------------------------- --------------------------------------------------------------------
Dated Signature of Agent
</TABLE>
(Tear here)
--------------------------------------------------------------------------------
MEDICAL INFORMATION BUREAU NOTICE
Information regarding your insurability will be treated as confidential. Federal
Kemper Life Assurance Company or Fidelity Life Association (we), or our
reinsurers, may, however, make a brief report thereon to the Medical Information
Bureau, a non-profit membership organization of life insurance companies, which
operates an information exchange on behalf of its members. If you apply to
another Bureau member company for life or health insurance coverage, or a claim
for benefits is submitted to such a company, the Bureau, upon request, will
supply such company with the information in its file.
Upon receipt of a request from you, the Bureau will arrange disclosure of any
information it may have in your file. If you question the accuracy of
information in the Bureau's file, you may contact the Bureau and seek a
correction in accordance with the procedures set forth in the Federal Fair
Credit Reporting Act. The address of the Bureau's information office is Post
Office Box 105, Essex Station, Boston, Massachusetts 02112, telephone number
(617) 426-3660.
We, or our reinsurers, may also release information in our file to other life
insurance companies to whom you may apply for life or health insurance, or to
whom a claim for benefits may be submitted.
THIS NOTIFICATION MUST BE GIVEN TO THE PROPOSED INSURED BEFORE THE APPLICATION
IS COMPLETED.
<PAGE> 4
FEDERAL KEMPER LIFE ASSURANCE COMPANY
FIDELITY LIFE ASSOCIATION, A Mutual Legal Reserve Company
Long Grove, IL 60049
--------------------------------------------------------------------------------
Policy number
LIFE APPLICATION -- PART A: GENERAL INFORMATION
--------------------------------------------------------------------------------
1. PROPOSED INSURED ( ) Male ( ) Female
----------------------------------------------------------------------------
First name Middle initial Last name
----------------------------------------------------------------------------
Former name if changed in last five years
----------------------------------------------------------------------------
Birthdate Age at nearest birthday Birthdate
(use to calculate premium) (state or country)
----------------------------------------------------------------------------
Social Security number Driver's license state/number
----------------------------------------------------------------------------
2. Street Address
----------------------------------------------------------------------------
City State Zip
----------------------------------------------------------------------------
Home phone ( )
----------------------------------------------------------------------------
3. What is your occupation?
----------------------------------------------------------------------------
Describe duties
----------------------------------------------------------------------------
Employer
----------------------------------------------------------------------------
Employer's street address
----------------------------------------------------------------------------
City State Zip
----------------------------------------------------------------------------
Business phone ( )
----------------------------------------------------------------------------
If more information is needed, you can be reached at:
( ) Home ( ) Work Best time of day:
----------------------------------------------------------------------------
4. Current annual earned income:
$
----------------------------------------------------------------------------
5. OWNER/APPLICANT ( ) Proposed Insured ( ) Other (complete below)
----------------------------------------------------------------------------
Name
----------------------------------------------------------------------------
Street
----------------------------------------------------------------------------
City State Zip
----------------------------------------------------------------------------
Relationship to Proposed Insured Social Security or Tax ID#
----------------------------------------------------------------------------
6. PREMIUM PAYOR (select one) ( ) Proposed
Insured
( ) Owner ( ) Other
(give name & address in #16)
----------------------------------------------------------------------------
7. BENEFICIARY DESIGNATION (Use Part E if additional space is needed.)
PRIMARY BENEFICIARY(S) & ADDRESS % OF RELATIONSHIP TO
(If trust, give name/date of trust) PROCEEDS PROPOSED INSURED
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONTINGENT BENEFICIARY(S) & ADDRESS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
<PAGE> 5
8. This application is to: (select one)
( ) Federal Kemper Life Assurance Company
( ) Fidelity Life Association
----------------------------------------------------------------------------
9. NAME OF INSURANCE PLAN (if applicable, INITIAL DEATH BENEFIT
indicate type: 1/5/10/15-year, etc.) (Specified amount, if UL)
----------------------------------------------------------------------------
If Universal Life:
( ) Option A: Specified amount includes cash value
( ) Option B: Specified amount plus the cash value
(If neither is selected, Option A will be assigned.)
----------------------------------------------------------------------------
Riders: ( ) WP/WMD ( ) FDR* Units
( ) WSP $ ( ) DCR* Units
( ) ( )
*COMPLETE PART D: MULTIPLE INSURED SUPPLEMENT.
----------------------------------------------------------------------------
10. If this application is to Fidelity Life Association, select the desired
dividend option, if applicable:
( ) Pay in cash ( ) Reduce premiums ( ) Accumulate at interest
( ) Buy additional paid-up insurance ( ) Other
---------------------------------------------------------------------------
11. A. Have you smoked cigarettes in the past 36 months? ( ) Yes ( ) No
B. Have you used tobacco in any other form in the
past 36 months? ( ) Yes ( ) No
Type Quantity
---------------------------------------------------------------------------
12. Have you ever been told you had, or been treated for:
diabetes, cancer, heat disease, alcoholism, drug abuse, or high blood
pressure? ( ) Yes ( ) No
(If Yes, preferred rates will not likely be available.)
---------------------------------------------------------------------------
13. Rate class applied for:
( ) Preferred non-tobacco ( ) Preferred tobacco
( ) Standard non-tobacco ( ) Standard tobacco
( ) Other
---------------------------------------------------------------------------
14. A. Bill frequency: B. Bill form:
( ) Annual ( ) Direct
( ) Semi-annual ( ) PAC (monthly only)
( ) Quarterly ( ) List (monthly only)
( ) Monthly (PAC or list only) ( ) Other
(For PAC, complete authorization form.)
C. Planned periodic premium: (UL plans only) $
---------------------------------------------------------------------------
15. Amount remitted with this application, in exchange for the conditional
receipt: $
DO NOT SUBMIT MONEY IF DEATH BENEFIT EXCEEDS $500,000.
---------------------------------------------------------------------------
16. SPECIAL REQUESTS
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Continued)
<PAGE> 6
17. INDIVIDUAL LIFE INSURANCE IN FORCE (If none, state none.)
(Do not list group) DATE PURPOSE
COMPANY AMOUNT ISSUED PERSONAL BUSINESS
---------------------------------------------------------------------------
a.
b.
c.
d.
e.
f.
---------------------------------------------------------------------------
18. Is this policy to replace any existing insurance or annuities?
(If Yes, complete required replacement forms.) ( ) Yes ( ) No
If Yes, indicate which policy(s)
----------------------------------------------------------------------------
19. Are there life insurance applications pending with any
other companies? (If Yes, complete the following.) ( ) Yes ( ) No
TO BE PLACED
IN ADDITION TO - PURPOSE -
COMPANY AMOUNT OUR POLICY? PERS. BUS.
---------------------------------------------------------------------------
20. Have you ever been refused life insurance or been asked to
pay extra premium for life insurance?
(If Yes, provide full details) ( ) Yes ( ) No
-----------------------------------------------------------------------------
21. Are you a U.S. citizen? (If No, complete below.) ( ) Yes ( ) No
----------------------------------------------------------------------------
Country of citizenship Type of Visa Expiration date
----------------------------------------------------------------------------
22. Have you traveled or lived outside the U.S. or Canada within the past
two years, or do you intend to in the next 24 months? ( ) Yes ( ) No
(If Yes, list country, reason, frequency and length of stay in #28.)
---------------------------------------------------------------------------
23. In the past three years, have you had three or more moving violations,
or had your driver's license suspended or revoked? ( ) Yes ( ) No
---------------------------------------------------------------------------
24. Have you ever been convicted of reckless driving, or driving under
the influence of alcohol or drugs? ( ) Yes ( ) No
(If #23 or #24 are Yes, give details, dates and current status in #28.)
---------------------------------------------------------------------------
25. Have you been convicted of, or are you awaiting trial for a
felony? (If Yes, give type, date and current status.) ( ) Yes ( ) No
---------------------------------------------------------------------------
26. In the past five years have you, OR do you intend to:
a. Scuba dive ( ) Yes ( ) No
b. Sky dive ( ) Yes ( ) No
c. Parachute ( ) Yes ( ) No
d. Hang glide ( ) Yes ( ) No
e. Mountain climb ( ) Yes ( ) No
f. Race motorcycles ( ) Yes ( ) No
g. Race automobiles ( ) Yes ( ) No
h. Race power boats ( ) Yes ( ) No
(If Yes, explain frequency, purpose, date of last activity and future
plans.)
---------------------------------------------------------------------------
<PAGE> 7
h. Race power boats ( ) Yes ( ) No
(If Yes, explain frequency, purpose, date of last activity and future
plans.)
---------------------------------------------------------------------------
<PAGE> 8
27. In the past five years, have you flown as a pilot or crew
member in any flying activity, OR do you intend to? ( ) Yes ( ) No
(If Yes, complete Part G: Aviation Supplement.)
---------------------------------------------------------------------------
28. Details of Yes answers for #20, 22-26 (Use Part E if additional space is
needed.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<PAGE> 9
PART B. AGREEMENT
I (we) have read all the questions and answers in the application, including
all required parts. All responses are true and complete to the best of my
(our) knowledge and belief. I (we) promise to tell the Company of any change
in the health or habits of the Proposed Insured that occurs after completing
this application, but before the Policy is delivered to me (us) and the
first premium is paid.
I (we) agree:
1. This application, including all of its parts, will be the basis for and form
part of the Policy;
2. An Agent has no authority to alter the Company's rules or requirements, this
Agreement, the Receipt, or the Policy;
3. The first premium will not be deemed paid unless any check, draft, or other
instrument of payment (given as premium) is paid in accordance with its
terms; and
4. (Except as provided in the Receipt, if given) the insurance applied for
never takes effect unless, during the lifetime of the Proposed Insured: (a)
the Policy has been issued, delivered to, and accepted by me (us); (b) the
required first premium has been paid; (c) any amendments issued with the
Policy have been completed and signed; all while the health and habits of
the Proposed Insured remain as stated in this application.
Amendments to plan, amounts, classification or benefits will be made only with
my (our) consent
--------------------------------------------------------------------------------
I (we) have received the notification about the Federal Fair Credit Reporting
Act and the Medical Information Bureau.
I hereby authorize: any licensed physician or medical practitioner; any
hospital, clinic or other medical or medically related facility; any insurance
company; the Medical Information Bureau; and any other organization, institution
or person, that has any records or knowledge of me or my health, to give to
Federal Kemper Life Assurance Company or Fidelity Life Association, or their
reinsurers, or the Medical Information Bureau, any such information. This
authorization is valid for two and one-half years from the date this form is
signed. An exact copy of this authorization is as valid as the original.
Signed at
City and state
on
Month/day/year
Signature of Agent/Witness
Signature of Proposed Insured (if age 15 or over)
Signature of Owner/Applicant, if other than Proposed Insured
Print Agent Name
Agent number
<PAGE> 10
APPLICATION TO
FEDERAL KEMPER LIFE ASSURANCE COMPANY
FIDELITY LIFE ASSOCIATION, A Mutual Legal Reserve Company
Long Grove, IL 60049
VARIABLE UNIVERSAL LIFE SUPPLEMENT
--------------------------------------------------------------------------------
Name of Proposed Insured Plan
Planned Premium Mode Payable
--------------------------------------------------------------------------------
PREMIUM ALLOCATION
KEMPER INVESTORS FUND
% Of Premium
(Whole Percentages Only)
Subaccount
% Money Market
% Total Return
% High Yield
% Equity
% Government Securities
% International
% Small Cap
OTHER FUNDS
% Of Premium
(Whole Percentages Only)
Subaccount
%
%
%
%
FIXED ACCOUNT
% Of Premium
(Whole Percentages Only)
%
Total of subaccounts plus fixed account must equal 100%
--------------------------------------------------------------------------------
SUITABILITY
ANNUAL EARNINGS
( ) $25,000 to $50,000 ( ) $50,000 to $100,000 ( ) $100,000 to
$200,000 ( ) over $200,000
NET WORTH
( ) $25,000 to $75,000 ( ) $75,000 to $125,000 ( ) $125,000 to
$250,000 ( ) over $250,000
FINANCIAL OBJECTIVES:
( ) Long Term Growth ( ) Preservation of Capital ( ) Maximum
Capital Appreciation
Other
( ) Check this box if you do not wish to provide this information.
--------------------------------------------------------------------------------
TELEPHONE AUTHORIZATION
<PAGE> 11
( ) Check here to authorize telephone transfers among the subaccounts and the
fixed account subject to the conditions of the Telephone Transfer
Agreement.
--------------------------------------------------------------------------------
I UNDERSTAND THAT
THE AMOUNT AND DURATION OF THE DEATH BENEFIT MAY VARY UNDER SPECIFIED
CONDITIONS. POLICY VALUES MAY INCREASE OR DECREASE IN ACCORDANCE WITH THE
EXPERIENCE OF THE SEPARATE ACCOUNT.
ILLUSTRATIONS OF BENEFITS, INCLUDING DEATH BENEFITS, POLICY VALUES, AND
CASH SURRENDER VALUES ARE AVAILABLE UPON REQUEST.
ALL STATEMENTS AND ANSWERS TO THE FOREGOING QUESTIONS ARE, TO THE BEST OF MY
KNOWLEDGE AND BELIEF: (A) COMPLETE; AND (B) TRUE. I AGREE (A) THAT THEY SHALL
FORM A PART OF MY APPLICATION; (B) THAT THEY SHALL BE SUBJECT TO THE TERMS OF
THE AGREEMENT FOUND IN THE APPLICATION; AND (C) THAT THEY SHALL BECOME A PART OF
ANY POLICY BASED ON MY APPLICATION.
Dated at
City and State
on
Month Day Year
Signature of Proposed Insured
Signature of Applicant and Owner
(if other than Proposed Insured)
Signature of Agent as Witness
<PAGE> 12
FEDERAL KEMPER LIFE ASSURANCE COMPANY
FIDELITY LIFE ASSOCIATION, A Mutual Legal Reserve Company
Long Grove, IL 60049
DOLLAR COST AVERAGING
I elect to Dollar Cost Average in the amount of $ ($500.00
minimum) per month from subaccount (only Money
Market or Government Securities Subaccount may be chosen) to the following
subaccounts and the fixed account. The subaccount from which Dollar Cost
Averaging amounts are taken must have an initial starting balance of at least
$10,000.
<TABLE>
<S> <C> <C>
KEMPER INVESTORS FUND OTHER FUNDS FIXED ACCOUNT
(Whole Percentages Only) (Whole Percentages Only) (Whole Percentages Only)
Subaccount Subaccount
% Money Market % %
% Total Return %
% High Yield %
% Equity %
% Government Securities %
% International
% Small Cap
Total of subaccounts plus fixed account must equal 100%
</TABLE>
Transfers will continue until you instruct otherwise, or until there is not
enough money in the source subaccount to make the transfer, whichever is
earlier.
--------------------------------------------------------------------------------
TELEPHONE TRANSFER AGREEMENT
By requesting the telephone transfer authorization, the Owner agrees and
understands that:
1. Neither the Company nor its agents or representatives who act on its behalf
shall be subject to any claim, loss, liability, cost or expense, if it acts in
good faith upon this telephone authorization.
2. Transfers will be made subject to the conditions of the contract,
administrative regulations of the Company and the prospectus.
3. Transfers from a subaccount shall be based on the accumulation unit value
next determined following receipt of a valid complete telephone transfer
instruction.
4. This authorization shall continue in force until the earlier of: a. written
revocation is received by the Company; or b. the Company discontinues this
privilege.
I understand that, as a condition of allowing telephone instructions to be made,
the Company, at its sole option and without prior disclosure to me, any person
or my representative, may record all or part of any telephone conversation,
containing such instructions. All terms are binding upon my agents, heirs and
assignees.
--------------------------------------------------------------------------------
AUTOMATIC ASSET REALLOCATION
( ) Check here to have the assets in the subaccounts redistributed to match the
premium allocations then in effect.
Frequency: ( ) Annually ( ) Quarterly
<PAGE> 1
EXHIBIT 3(a)
February 1, 1995
Federal Kemper Life Assurance Company
1 Kemper Drive
Long Grove, Illinois 60049
Dear Sirs:
This opinion is furnished in connection with the filing of an S-6 Registration
Statement ("Registration Statement") by Federal Kemper Life Assurance Company
("FKLA") for the FKLA Variable Separate Account ("Variable Separate Account").
The Registration Statement covers an indefinite number of units of interest in
the Variable Separate Account. Premiums to be received under individual
flexible premium variable life insurance policies ("Policies") offered by FKLA
may be allocated by FKLA to the Variable Separate Account in accordance with
the owners' direction with reserves established by FKLA to support such
Policies.
The Policies are designed to provide life insurance protection and are to be
offered in a manner described in the Prospectus which is included in the
Registration Statement.
The Policies will be sold only in jurisdictions authorizing such sales.
I have examined all applicable corporate records of FKLA and such other
documentation and laws as I consider appropriate as a basis of this opinion.
On the basis of such examination, it is my opinion that:
1. FKLA is a corporation duly organized and validly existing under the laws
of the State of Illinois.
2. The Variable Separate Account is an account established and maintained by
FKLA pursuant to the laws of the State of Illinois, under which income, gains
and losses, whether or not realized, from assets allocated to the Variable
Separate Account, are, in accordance with the Policies, credited to or charged
against the Variable Separate Account without regard to other income, gains or
losses of FKLA.
3. Assets allocated to the Variable Separate Account will be owned by FKLA.
The policies provide that the portion of the assets of the Variable Separate
Account equal to the reserves and other Policy liabilities with respect to the
Variable Separate Account will not be chargeable with liabilities arising out
of any other business FKLA may conduct.
4. When issued and sold as described above, the Policies will be duly
authorized and will constitute validly issued and binding
<PAGE> 2
obligations of FKLA in accordance with their terms.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the references to my name under the heading "Legal Matters" in
the Prospectus.
Yours truly,
[ sig. ]
Frank J. Julian
Assistant General Counsel
<PAGE> 1
EXHIBIT 3(b)
ACTUARIAL OPINION
This opinion is supplied with the filing of a Registration Statement on Form
S-6, File No. 33-79808, by the FKLA Variable Separate Account and Federal
Kemper Life Assurance Company (FKLA) covering an indefinite number of units of
interest in the Separate Account. Premiums received under FKLA's Flexible
Premium Variable Life Insurance Policies may be allocated by FKLA to the
Separate Account as described in the Prospectus included in the Registration
Statement.
I am familiar with the Policy provisions and the description in the Prospectus
and it is my opinion that the illustrations of death benefits, cash values,
surrender values, and accumulated premiums included in Appendix A of the
Prospectus, based on the assumptions and illustrations, are consistent with the
Policy provisions. The policy rate structure has not been designed to make the
relationship between planned premiums and benefits, as shown in the
illustrations, appear more favorable to prospective male preferred nonsmokers
ages 35 and 55, than to male preferred nonsmokers at other ages. The nonsmoker
rate class generally has a more favorable rate structure than other rate
classes. Female rate classes generally have a more favorable rate structure
than male rate classes.
The current and guaranteed monthly mortality rates used in the illustrations
have not been designed so as to make the relationship between current and
guaranteed rates more favorable for the ages and sexes illustrated than for a
male preferred nonsmoker at other ages. The nonsmoker rate classes generally
have lower monthly mortality rates than the other rate classes. The female
rate classes generally have lower monthly mortality rates than the male rate
classes.
I consent to the use of this opinion as an Exhibit to the Registration
Statement and the reference to me under the heading "Experts" in the
Prospectus.
Steven D. Powell, FSA MAAA
[ sig. ]
____________________________
Vice President, Senior Associate Actuary
<PAGE> 1
EXHIBIT 6(A)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
FEDERAL KEMPER LIFE ASSURANCE COMPANY:
We consent to the use of our report included herein on Federal Kemper Life
Assurance Company and to the reference to our firm under the heading "Experts"
in the prospectus. As discussed in the notes to Federal Kemper Life Assurance
Company's financial statements, effective January 1, 1993 Federal Kemper Life
Assurance Company changed its method of accounting for impairment of loans
receivable to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by
Creditors for Impairment of a Loan.
Our report dated March 7, 1994, contains an explanatory paragraph that
states that the Company prepares its financial statements in conformity with
accounting practices prescribed or permitted by the Illinois Insurance
Department. When statutory financial statements are presented for purposes other
than for filing with a regulatory agency, generally accepted auditing standards
require that an auditor's report on them state whether they are presented in
conformity with generally accepted accounting principles. The accounting
practices used by the Company vary from generally accepted accounting principles
as explained in note 1 to the Company's statutory financial statements and the
Company has not determined the effects of these variances. Accordingly, we were
not engaged to audit, and we did not audit, the effects of these variances.
Since the statutory financial statements do not purport to be a presentation in
conformity with generally accepted accounting principles, we are not in a
position to express and do not express an opinion on the statutory financial
statements as to the fair presentation of financial position, results of
operations, or cash flows in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 23, 1995
<PAGE> 1
EXHIBIT 8
Description of FKLA's Issuance, Transfer
and Redemption Procedures for Policies
Pursuant to Rule 6e-3(T)(b)(12)(iii)
under the Investment Company Act of 1940
I. INTRODUCTION
Set forth below is the information called for under Rule 6e-3(T)(b)(12)(iii)
under the Investment Company Act of 1940 ("1940 Act"). That rule provides an
exemption for separate accounts, their investment advisers, principal
underwriters and sponsoring insurance company from Sections 22(d), 22(e), and
27(c)(1) of the 1940 Act, and Rule 22c-1 promulgated thereunder, for issuance,
transfer and redemption procedures under flexible premium variable life
insurance policies to the extent necessary to comply with Rule 6e-3(T), state
administrative law or established administrative procedures of the life
insurance company. In order to qualify for the exemption, procedures must be
reasonable, fair and not discriminatory and they must be disclosed in the
registration statement filed by the separate account.
The FKLA Variable Separate Account (the "Separate Account") is registered under
the 1940 Act. Within the Separate Account are Subaccounts, which are as of the
date of this filing, the Money Market Subaccount, the Total Return Subaccount,
the High Yield Subaccount,
<PAGE> 2
the Equity Subaccount, the Government Securities Subaccount, the International
Subaccount and the Small Capitalization Equity Subaccount (the "Subaccounts").
Procedures apply equally to each Subaccount and for purposes of this
description are defined in terms of the Separate Account, except where a
discussion of both the Separate Account and its Subaccounts is necessary. Each
Subaccount invests in shares of a corresponding portfolio of the Kemper
Investors Fund (the "Fund"), a "series" type of mutual fund registered under
the 1940 Act. The investment experience of the Subaccounts of the Account
depends on the market performance of the corresponding fund portfolios.
FKLA believes its procedures meet the requirements of Rule 6e-3(T)(b)(12)(iii)
and states the following:
A. Because of the insurance nature of FKLA's flexible premium
variable life insurance policies ("policies") and due to the
requirements of state insurance laws, the procedures
necessarily differ in significant respects from procedures for
mutual funds and contractual plans for which the 1940 Act was
designed.
B. Many of the procedures used by FKLA have been adopted from its
established procedures for its flexible premium universal life
insurance policies.
C. In structuring its procedures to comply with Rule 6e-3(T),
state insurance laws and its established administrative
procedures, FKLA has attempted to comply with the intent of
the 1940 Act, to the extent deemed feasible.
D. In general, state insurance laws require that FKLA's
procedures be reasonable, fair and not discriminatory.
E. Because of the nature of the insurance product, it is often
difficult to determine precisely when FKLA's procedures
deviate from those required under Section 22(d), 22(e) or
27(c)(1) of the 1940 Act or Rule 22c-1 thereunder.
Accordingly, set out below is a summary of the principal
policy provisions and procedures which may
<PAGE> 3
be deemed to constitute, either directly or indirectly, such a
deviation. The summary, while comprehensive, does not attempt
to address each and every procedure of variation which might
occur and does include certain procedural steps which might be
deemed as deviations from the above-cited sections rules.
II. ISSUANCE
This section outlines those provisions and administrative procedures which
might be deemed to constitute, either directly or indirectly, a "purchase"
transaction. Because of the insurance nature of the policy, the procedures
involved necessarily differ in certain significant respects from the purchase
procedures for mutual funds and contractual plans. The chief differences
revolve around the structure of the cost of insurance and the insurance
underwriting (i.e., evaluation of risk) process. There are also certain policy
provisions, such as reinstatement, which do not result in the issuance of a
policy but which require certain payments by the Policyowner and involve a
transfer of assets supporting the policy reserve into the Account.
A. Insurance Charges and Underwriting Standards
Cost of insurance charges for FKLA's policies will not be the same for all
policy holders. The chief reason is that the principle of pooling and
distribution of mortality risks is based on the assumption that each
policyowner pays a cost of insurance charge commensurate with the insured
person's mortality risk. This mortality risk is actuarially determined based
upon factors such as age, smoking status, sex, health, and occupation. Each
insured is charged a monthly deduction based on applying a cost of
<PAGE> 4
insurance rate commensurate with his/her mortality risk to the Net Amount at
Risk.
The policies will be offered and sold pursuant to the cost of insurance
schedules and underwriting standards and in accordance with state insurance
laws. Such laws prohibit discrimination among insureds, but recognize that
premiums must be based on factors such as age, sex, health and occupation. A
table showing the maximum cost of insurance rates will be delivered as part of
the policy.
B. Application and Initial Premium Processing
1. DEATH BENEFIT
The Death Benefit for the policies is based on the death
benefit option and specified amount selected and the table of
death benefit percentages applicable at the time of death. A
policy will be issued if the following conditions are met:
a. A premium payment of at least $50 is paid.
b. A completed application is submitted.
c. Required underwriting information, satisfactory to
FKLA, is provided.
<PAGE> 5
2. POLICY ISSUE
Before FKLA will issue a policy, it must receive a completed
application and a full initial premium at its Home Office. A policy
ordinarily will be issued only for Insureds Age 0 through 85 who
supply satisfactory evidence of insurability to FKLA. Acceptance of an
application is subject to underwriting by FKLA. FKLA reserves the
right to decline an application for any reason.
After underwriting is complete and the policy is delivered to the
owner, insurance coverage under the policy will be deemed to have
begun as of the day following the date of receipt of a completed
application and the full initial premium. This date is the Policy
Date.
3. PREMIUMS
Premiums are to be paid to FKLA at its Home Office. Checks ordinarily
must be made payable to FKLA.
Initial Premium - The minimum initial premium that FKLA will accept
under a policy is $50.00. FKLA reserves the right to increase or
decrease this amount for a class of policies issued after some future
date.
On the day following the date of receipt, the net initial premium will
be allocated to the Money Market Subaccount. This premium
<PAGE> 6
will remain in the Money Market Subaccount until the Trade Date. On
the Trade Date, Separate Account Value in the Money Market Subaccount
will be allocated to the Subaccounts and the Fixed Account in
accordance with elections by the Owner in the application for the
policy.
The Policy Date is the date used to determine Policy Years and Monthly
Processing Dates. The Policy Date will be the date following receipt
of the application, except that if such date is the 29th, 30th, or
31st of a month, the Policy Date will be the first of the following
month. Acceptance is subject to FKLA's underwriting rules, and FKLA
reserves the right to reject an application for any reason.
The Policy Date is the date when FKLA accepts the risk of providing
insurance coverage to the Insured. Monthly deductions begin as of the
Policy Date.
The cost of insurance for the full amount of coverage issued is
applied as of the Policy Date. This is consistent with established
administrative procedures of FKLA and is permitted and consistent with
common insurance company administrative practice and insurance laws.
Additional Premiums - Subject to the premium guidelines established
under Federal tax law, additional premiums may be contributed while
this policy is in force, including when
<PAGE> 7
necessary to prevent lapse. Upon request, FKLA will tell the Owner
whether an additional premium payment can be made and what its maximum
amount is. These premium payments will not increase the maximum
possible Surrender Charge. Except to prevent lapse, such an additional
premium payment must be at least $50.00. FKLA reserves the right to
limit the ability to make more than one additional premium payment in
each Policy Year. Evidence of insurability may be required if an
additional premium payment would result in an increase in the Death
Benefit.
4. ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE
Allocation of Premiums - The Owner allocates premiums to Subaccounts
of the Separate Account. The Owner must indicate the initial
allocation in the policy application. On the Trade Date, the policy's
Separate Account Value in the Money Market Subaccount will be
allocated to the Subaccounts of the Separate Account and the Fixed
Account in accordance with the Owner's allocation instructions in the
application. Additional premiums received will continue to be
allocated in accordance with the Owner's instructions in the
application unless contrary written instructions are received. Once a
change in allocation is made, all future premiums will be allocated in
accordance with the new allocation, unless contrary written
instructions are received.
<PAGE> 8
C. Delivery Period - Policies Issued - Other Than As Applied For
1. FKLA will take steps to protect itself against anti-selection
by the prospective Owner resulting from a deterioration in the
health of the proposed Insured including requiring policies to
be delivered promptly. Generally, the period will not exceed
60 days from the date the policy is issued.
2. Failure to Complete Delivery - FKLA will review the file to
verify that delivery requirements were not satisfied.
a. If FKLA determines that delivery was satisfied, the
policy will be placed in force as of the Policy Date.
b. If delivery was not satisfied, the policy will be
terminated as of the Policy Date and any premium
refunded to the Owner, subject to the refund rules
mentioned herein. Notification will be sent to the
Owner advising him or her that delivery was never
completed and that no insurance has been in effect.
D. Delivery Requirements
1. An agent/agency must submit all outstanding delivery
requirements to the FKLA Home Office prior to the end of the
delivery period.
2. The FKLA Home Office cannot accept partial requirements;
however, if an agency does inadvertently submit only part of
the requirements necessary to complete delivery, FKLA
<PAGE> 9
will record any documents as received, and return the policy
to the agency with a memo advising them of the remaining
requirements.
3. Any money submitted with incomplete delivery requirements will
be returned to proposed owner with correspondence specifying
the remaining requirements.
4. If a policy is reported as delivered after the delivery period
has expired, the policy will be placed in force, subject to
Underwriting approval.
5. If a policy is returned to the agency due to incomplete
requirements, a delivery extension may be obtained on the
agency's behalf.
E. Policy Lapse
Lapse will occur when the Surrender Value of a policy is insufficient to cover
the monthly deductions and a grace period expires without a sufficient payment
being made.
The duration of coverage depends upon the Surrender Value being sufficient to
cover the monthly deductions.
A grace period of 61 days will be given to the Owner. It begins when notice is
sent that the Surrender Value of the policy is insufficient to cover the
monthly deductions. Failure to make a
<PAGE> 10
premium payment or loan repayment during the grace period sufficient to keep
the policy in force for three months will cause the policy to 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
the most current allocation instructions, unless otherwise requested. Amounts
over and above the amounts necessary to prevent lapse may be paid as additional
premiums, however, to the extent otherwise permitted.
FKLA will not accept any payment that would cause the total premium payment to
exceed the maximum payment permitted by the Code. However, the Owner may
voluntarily repay a portion of Debt to avoid lapse.
If premium payments have not exceeded the maximum payment permitted by the
Code, the Owner may choose to make a larger payment than the minimum required
payment to avoid the recurrence of the potential lapse of coverage. The Owner
may also combine premium payments with Debt repayments.
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.
F. Reinstatement
<PAGE> 11
If a policy lapses because of insufficient Surrender Value to cover the monthly
deductions, and it has not been surrendered for its Surrender Value, it may be
reinstated at any time within three years after the date of lapse.
Reinstatement is subject to:
1. receipt of evidence of insurability satisfactory to FKLA;
2. payment of a minimum premium sufficient to cover monthly
deductions for the grace period and to keep the policy in
force three months; and
3. payment or reinstatement of any Debt against the policy which
existed at the date of termination of coverage.
The effective date of reinstatement of a Policy will be the Monthly Processing
Date that coincides with or next follows the date the application for
reinstatement is approved by FKLA. Suicide and incontestability provisions will
apply from the effective date of reinstatement.
G. Contestability
1. This policy is contestable for two years during the lifetime
of the Insured, measured from the Issue Date, for material
misrepresentations made in the initial application for the
policy. Policy changes and reinstatements may be contested for
two years after the effective date of change or reinstatement.
No statement will be used to contest a policy unless it is
contained in an application. The two year limitation does not
apply in the event of fraud.
III. TRANSFER PROCEDURES
<PAGE> 12
A. Separate Account Value may be transferred among the
Subaccounts of the Separate Account and the Fixed Account. One
transfer of all or a part of the Separate Account Value may be
made within a fifteen day period. All transfers made during a
business day will be treated as one request. Fixed Account
Value may be transferred to one or more Subaccounts. One
transfer of part of the Fixed Account Value may be made once
each Policy Year in the thirty day period following the end of
a Policy Year.
1. Transfer requests must be in writing in a form
acceptable to FKLA, or by telephone authorization
under forms authorized by FKLA.
2. The minimum partial transfer amount is $500. No
partial transfer may be made if the value of the
Owner's remaining interest in a Subaccount or the
fixed account, from which amounts are to be
transferred, would be less than $500 after such
transfer.
3. Transfers will be based on the Accumulation Unit
Values next determined following receipt of valid
complete transfer instructions by FKLA.
4. The transfer provision may be suspended, modified or
terminated at any time by FKLA.
5. Written acknowledgement of transfers between
Subaccounts will be provided at two points in time:
a. A confirmation notice will be sent to the
Owner within seven days of receipt of the
request.
b. The annual report will also reflect transfers.
B. Policy Loans
1. After the Trade Date the Owner may by written request to FKLA
borrow all or part of the maximum loan amount of the policy.
The maximum loan amount is 95% of
<PAGE> 13
the policy's Cash value minus applicable surrender charges.
The amount of any new loan may not exceed the maximum loan
amount less Debt on the date a loan is granted. The minimum
amount of a loan is $500. Any amount due an Owner under a
Policy Loan ordinarily will be paid within 7 days after FKLA
receives a loan request at its Home Office, although payments
may be postponed under certain circumstances.
2. On the date a loan is made, an amount equal to the loan amount
will be transferred from the Separate Account and Fixed
Account to the loan account in the General Account. Unless the
Owner directs otherwise, the loaned amount will be deducted
from the Subaccounts and Fixed Account in proportion to the
values that each bears to the Separate Account Value of the
policy in all of the Subaccounts plus the Fixed Account Value
at the end of the Valuation Period during which the request is
received.
3. If Surrender Value on the day immediately preceding a Monthly
Processing Date is less than the monthly deduction for the
next month, FKLA will notify the Owner and any assignee of
record.
<PAGE> 14
4. A policy loan will have an effect on the Cash Value of a
policy. The collateral for the loan (in the Loan Account) does
not participate in the experience of the Subaccounts or the
current interest rate of the Fixed Account while the loan is
outstanding. If the amount credited to the Loan Account is
more than the amount that would have been earned in the
Subaccounts of the Fixed Accounts, 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
Accounts, the Cash Value, as well as the Death Benefit, may be
less.
C. Loan Interest
1. The loan interest will be assessed at an effective annual rate
of 5.00%. Interest not paid will be added to the loan amount
due and bear interest at the same rate.
2. Cash Value in the loan account will earn 3.00% annual interest
for the first nine Policy Years and 5% annual interest
thereafter. Such earnings will be allocated to the Loan
Account.
<PAGE> 15
D. Loan Repayment
1. While the policy is in force, policy loans may be repaid at
any time, in whole or in part. At the time of repayment, Cash
Value in the loan account equal to the amount of the repayment
which exceeds the difference between interest due and interest
earned will be allocated to the Subaccounts and the Fixed
Account, according to the Owner's current allocation
instructions, unless otherwise requested by the Owner.
Transfers from the Loan Account to the Separate Account or the
Fixed Account as a result of the repayment of Debt will be
allocated at the end of the Valuation Period during which the
repayment is received. Such transfers will not be counted in
determining the transfers made within a 15 day period.
2. FKLA will provide written confirmation of loan repayments,
including the effective date of the payment, and the effect on
specific Subaccounts and the General Account, within seven
days of the receipt of payment.
E. Policy Anniversary and Monthly Processing Date
1. The Cost of Insurance (COI) is calculated on the net amount at
risk using current rates. After calculating COI, substandard
ratings are applied. Increases in specified amount can be
rated separately from the original rating.
<PAGE> 16
2. The calculated monthly deductions are distributed among the
funds and the Fixed Account according to the selected
allocation percentages specified by the policyholder.
IV. REDEMPTION PROCEDURES
The following outlines are administrative procedures attendant to transactions
which involve redemption of a policy's values.
A. Free Look Period
1. The Owner may, until the end of the period of time specified
in the policy, examine the policy and return it for a refund.
The applicable period of time will depend on the state in
which the policy is issued; however, it will be at least 10
days from the date the policy is received by the Owner. The
amount of the refund will be at least equal to the premium
paid. An Owner seeking a refund should return the policy to
FKLA at its Home Office or to the agent who sold the policy.
2. The policyowner will receive a refund equal to the Cash Value
of the policy plus any monthly deductions and Cash Value of
the policy plus any monthly deductions and any deductions made
against premiums.
3. Refunds will be made within seven working days of receipt of
the request, providing the original payment has had
<PAGE> 17
sufficient time from the date of our deposit to clear the
payor's bank account. Normally, this is 30 days for payments
made by personal check, money order or cashier's check. Any
refund or portion thereof is subject to being held in FKLA's
office until this time requirement is met. If only a portion
of the refund is needed to meet the time requirements, the
undisputed portion will be released within the seven day time
frame. The disputed portion will be held until the time
requirement is met and then refunded by separate check. Any
refund that needs to be held to meet the time requirement from
FKLA date of deposit can be expedited if the payor submits
proof that the item has been honored by the bank.
B. Surrender Privilege and Charges
1. While the Insured is living and the policy is in force, the
Owner may surrender the policy for its Surrender Value. To
surrender the policy, the Owner must make written request to
FKLA at its Home Office and return the policy to FKLA. The
Surrender Value is equal to the Cash Value less any applicable
Surrender Charge and any Debt. After the Trade Date, a Policy
Owner may make withdrawals of amounts less than the Surrender
Value. The minimum amount of each withdrawal is $500.
Surrender charges will apply to the extent aggregate
withdrawals exceed Cash Value less total premiums paid.
Amounts in excess of total
<PAGE> 18
premiums paid will be considered to be withdrawn first. A $25
withdrawal charge will be imposed for processing each
withdrawal. A withdrawal will decrease the Cash Value by the
amount of the withdrawal and if Death Benefit Option A is in
effect, will reduce the Specified Amount by the amount of the
withdrawal and any applicable surrender charge.
2. A 2.5% charge is deducted from each premium to reimburse FKLA
for the payment of state premium taxes. In addition, a charge
for federal taxes equal to 1% of each premium payment will be
deducted to compensate FKLA for a higher corporate income tax
liability resulting from changes made to the Internal Revenue
Code by the Omnibus Budget Reconciliation Act of 1990.
3. A contingent deferred sales charge ("Surrender Charge") will
be used to cover expenses relating to the distribution of the
policy including commissions paid to sales personnel, and
other promotion and acquisition expenses. If this policy is
surrendered or if the Cash Value is applied under a Settlement
Option, the amount payable may reflect a deduction for
applicable Surrender Charges. In addition, the Surrender
Charge may apply against a partial withdrawal.
4. A Surrender Charge will not be assessed against Cash
<PAGE> 19
Values applied under a settlement option if the policy has
been in force for five or more years and the settlement option
elected provides for benefit payments of at least five years.
The amount of the Surrender Charge will be calculated as a
percentage of the lesser of premium paid in the first Policy
Year or Cash Value under the policy.
5. The charge decreases from 6% to 0% depending on the length of
time between the Policy Date and the date of surrender or
application under a settlement option.
6. During the period from the Policy Date to the fifth Policy
Anniversary, the rate is 6%; on the fifth Policy Anniversary,
the rate decreases to 5%, and on each of the next three Policy
Anniversaries it will decrease an additional 1%. Thus, there
will be no Surrender Charge beginning on the ninth Policy
Anniversary.
7. The applicable Surrender Charge will be determined based upon
the date of receipt of the written request for surrender.
8. No minimum amount of Surrender Value is guaranteed.
<PAGE> 20
9. FKLA will make the payment of Surrender Value out of its
General Account and at the same time, transfer assets from the
Separate Account to the General Account in an amount equal to
the policy reserves in the Separate Account.
C. Death Claims
1. FKLA will ordinarily pay a death benefit to the beneficiary
within seven calendar days after receipt, at its Home Office,
of the policy, due proof of death of the Insured and all other
requirements necessary* to make payment. FKLA will send the
check to the beneficiary with seven days after FKLA receives
all required documents.
2. FKLA will make payment of the death benefit out of its General
Account, and will transfer assets from the Separate Account to
the General Account in an amount equal to the reserve in the
Separate Account. The excess, if any, of the death benefit
over the amount transferred will be paid out of the General
Account reserve maintained for that purpose.
* State insurance laws impose various requirements, such as receipt of a
tax waiver, before payment of the death benefit may be made. In
addition, payment of the death benefit is subject to the provisions of
the policies regarding suicide and incontestability.
<PAGE> 21
D. Premium Refunds
FKLA will not normally refund premium payments unless one of the
following situations occurs:
1. The Insured is rated substandard during the underwriting
process and the Owner does not accept the rating.
2. The proposed Insured is determined to be uninsurable by FKLA's
standards.
3. The premium paid is in permanent suspense because underwriting
requirements were never completed.
4. The delivery period has expired and delivery has not been
completed.
5. The Owner exercises the Free Look Privilege.
6. The premium payment would disqualify the policy as life
insurance coverage; (see Guideline Premium Test) however, in
this instance, the payment will first be applied as a
repayment of any outstanding loans.
7. In the event an application is declined by FKLA, the initial
premium will be refunded, together with the earnings credited
based on the investment experience of the FKLA Money Market
Subaccount.
<PAGE> 22
E. Guideline Premium Test - Tax Qualification
The Guideline Premium Test is a two part test applied to determine if a policy
qualifies as life insurance as defined in the IRS Code, Section 7702.
1. Part I - Guideline Premium Limitation. The sum of the actual premiums
paid into the contract cannot exceed the greater of:
a. the guideline single premium, or
b. the sum of the guideline level premiums at that time.
2. The guideline single premium is the premium needed at issue for the
future benefits under contract, computed on the basis of:
a. the guaranteed mortality charges specified in the contract.
b. other guaranteed charges specified in the contract, and
c. an interest rate which is the greater of an annual effective
rate of six percent or the rate or rates guaranteed at issue.
3. For this plan the guideline single premium is based on:
a. the guaranteed maximum mortality rates, for all durations.
b. mortality and expense risk charge, and
c. six percent interest.
4. Guideline level premiums are the annual premium version of the
guideline single premium based on the above
<PAGE> 23
assumptions and a premium payment period extending to age 95. The
interest rate used will be four percent. At the point where a policy
is recognized as being out of compliance, the Death Benefit must be
increased or premiums refunded as necessary for qualification as life
insurance.
5. Part II - Cash Value Corridor Requirement. The Cash Value test
regulates the ratio of the policy Cash Value to the death benefit
regardless of the effect of the guideline premium limit. The death
benefit payable under the contract must always be greater than or
equal to the policy Cash Value times the death benefit factor.
Death benefit factors vary only by attained age and range from 1.00 to
2.50 for the FKLA VUL.
A check for compliance will be made at the time premiums are applied
and at least annually thereafter. If a violation is detected, the
agent will be notified and monies refunded.
F. Misstatement of Age or Sex
If the age or sex of the Insured is misstated, the Cash Value and Death Benefit
will be recalculated from the Policy Date based on the correct sex and age.
<PAGE> 24
G. Postponement of Payments
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 closing, or trading on the New York Stock
Exchange is restricted as determined by the SEC;
2. The SEC by order permits postponement for the protection of
Owners; or
3. An emergency exists, as determined by the SEC, as a result of
which disposal of securities of the Fund 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.
H. Payment Not Honored by Bank
The portion of any payment due under the policy which is derived from any
amount paid to FKLA by check or draft may be postponed until such time as FKLA
determines that such instrument has been honored by the bank upon which it was
drawn.
<PAGE> 25
I. Suicide
Suicide by the Insured, while sane or insane, within two years from the Policy
Date of the policy is a risk not assumed under the policy. FKLA's 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 will be as stated in such laws.
V. RECORDS AND REPORTS
FKLA will maintain all records relating to the Separate Account. FKLA will send
Owners, at their last known address of record, an annual report stating the
Death Benefit, the Accumulation Unit Value, the Cash Value and Surrender Value
under the policy, and indicating any additional premium payments, transfers,
policy loans and repayments and charges made during the Policy Year. Owners
will also be sent annual and semi-annual reports for the Fund to the extent
required by the 1940 Act.
