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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1995
FILE NO. 811-8592
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM N-8B-2
REGISTRATION STATEMENT OF UNIT INVESTMENT TRUSTS
WHICH ARE CURRENTLY ISSUING SECURITIES
PURSUANT TO SECTION 8(B) OF THE INVESTMENT COMPANY ACT OF 1940
FKLA VARIABLE SEPARATE ACCOUNT
(Name of Unit Investment Trust)
NOT THE ISSUER OF PERIODIC PAYMENT PLAN CERTIFICATES.
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X ISSUER OF PERIODIC PAYMENT PLAN CERTIFICATES.
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I.
ORGANIZATION AND GENERAL INFORMATION
1. (a) Furnish name of the trust and the Internal Revenue Service Employer
Identification Number.
FKLA VARIABLE SEPARATE ACCOUNT (the "Separate Account"). There is no
Internal Revenue Service Employer Identification Number for the Separate
Account.
(b) Furnish title of each class or series of securities issued by the
trust.
Units of interest in the Separate Account under Flexible Premium
Variable Life Insurance Policies (the "Policies").
2. Furnish name and principal business address and ZIP Code and the
Internal Revenue Service Employer Identification Number of each depositor of the
trust.
Federal Kemper Life Assurance Company
(the "Company" or "FKLA")
1 Kemper Drive
Long Grove, IL 60049
IRS Employer Identification Number: 04-6046830
3. Furnish name and principal business address and ZIP Code and the
Internal Revenue Service Employer Identification Number of each custodian or
trustee of the trust indicating for which class or series of securities each
custodian or trustee is acting.
There is no custodian or trustee.
4. Furnish name and principal business address and ZIP Code and the
Internal Revenue Service Employer Identification Number of each principal
underwriter currently distributing securities of the trust.
No Policies are being currently distributed. When such distribution
commences, the principal underwriter will be
Investors Brokerage Services, Inc.
1 Kemper Drive
Long Grove, IL 60049
IRS Employer Identification Number: 36-2660892
5. Furnish name of state or other sovereign power, the laws of which govern
with respect to the organization of the trust.
Illinois
6. (a) Furnish the dates of execution and termination of any indenture or
agreement currently in effect under the terms of which the trust was organized
and issued or proposes to issue securities.
The Separate Account was established pursuant to Illinois law by
resolution of the Executive Committee of the Board of Directors of the
Company adopted on May 27, 1994. The Separate Account will continue in
existence until its complete liquidation and the distribution of its assets
to the persons entitled to receive them. The resolution authorizes the
issuance of the Policies.
(b) Furnish the dates of execution and termination of any indenture or
agreement currently in effect pursuant to which the proceeds of payments on
securities issued or to be issued by the trust are held by the custodian or
trustee.
Not applicable, for the reasons set forth under Item 3, which is
incorporated herein by reference.
7. Furnish in chronological order the following information with respect to
each change of name of the trust since January 1, 1930. If the name has never
been changed, so state.
The Separate Account has never been known by any other name.
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8. State the date on which the fiscal year of the trust ends.
The fiscal year of the Separate Account ends on December 31.
9. MATERIAL LITIGATION. Furnish a description of any pending legal
proceedings, material with respect to the security holders of the trust by
reason of the nature of the claim or the amount thereof, to which the trust, the
depositor, or the principal underwriter is a party or of which the assets of the
trust are the subject, including the substance of the claims involved in such
proceeding and the title of the proceeding. Furnish a similar statement with
respect to any pending administrative proceeding commenced by a governmental
authority or any such proceeding or legal proceeding known to be contemplated by
a governmental authority. Include any proceeding which, although immaterial
itself, is representative of, or one of, a group which in the aggregate is
material.
There is no litigation pending to which the Separate Account is a
party.
II.
GENERAL DESCRIPTION OF THE TRUST AND SECURITIES OF THE TRUST
GENERAL INFORMATION CONCERNING THE SECURITIES OF THE TRUST AND THE RIGHTS OF
HOLDERS
10. Furnish a brief statement with respect to the following matters for
each class or series of securities issued by the Trust:
(a) Whether the securities are of the registered or bearer type.
The Policies which are to be issued are of the registered type
insofar as all Policies are owned by the person named in a Policy as the
Owner (the "Owner"), and the records concerning the Owner are maintained
by or on behalf of the Company.
(b) Whether the securities are of the cumulative or distributive type.
The Policies are of the cumulative type, providing for no direct
distribution of income, dividends or capital gains. Such amounts are not
separately identifiable but are reflected in the Policy values and death
benefit under a Policy at any time.
(c) The rights of security holders with respect to withdrawal or
redemption.
See "Summary," "Policy Benefits and Rights -- Surrender Privilege
and Free Look Period" in the Prospectus in Exhibit D, incorporated
herein by reference.
(d) The rights of security holders with respect to conversion,
transfer, partial redemption, and similar matters.
See "Summary," "The Policy -- Allocation of Premiums and Separate
Account Value" and "Policy Benefits and Rights -- Surrender Privilege"
"Dollar Cost Averaging" and "Systematic Withdrawal Plan" in the
Prospectus in Exhibit D, incorporated herein by reference.
(e) If the trust is the issuer of periodic payment plan certificates,
the substance of the provisions of any indenture or agreement with respect
to lapses or defaults by security holders in making principal payments, and
with respect to reinstatement.
See "Summary" and "The Policy -- Policy Lapse and Reinstatement" in
the Prospectus in Exhibit D, incorporated herein by reference.
(f) The substance of the provisions of any indenture or agreement with
respect to voting rights, together with the names of any persons other than
security holders given the right to exercise voting rights pertaining to
the trust's securities or the underlying securities and the relationship of
such persons to the trust.
See "Voting Interests" in the Prospectus in Exhibit D, incorporated
herein by reference.
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(g) Whether security holders must be given notice of any change in:
(1) the composition of the assets of the trust.
See "The Fund -- Change of Investments" in the Prospectus in
Exhibit D, incorporated herein by reference. Except to the extent
described in the Prospectus, no changes in the terms and conditions
of the Policies can be made without notice to and/or consent of
Policy Owners. As described in the response to other items of this
form, however, the Policies permit the Company to exercise discretion
in changing certain fees and charges, restricting certain Policy
Owner rights and taking certain other actions.
(2) the terms and conditions of the securities issued by the trust.
See (g)(1) above which is incorporated herein by reference.
(3) the provisions of any indenture or agreement of the trust.
No notice to or consent from Owners is required in connection
with any change in the provisions of the resolution of the Company's
Board of Directors pursuant to which the Separate Account was
established and the Policies will be issued.
(4) the identity of the depositor, trustee or custodian.
There is no requirement for notice to, or consent of Owners with
respect to any change in the identity of the Separate Account's
depositor.
(h) Whether the consent of security holders is required in order for
action to be taken concerning any change in:
(1) the composition of the assets of the trust.
See (g)(1) above, which is incorporated herein by reference.
(2) the terms and conditions of the securities issued by the trust.
See (g)(3) above, which is incorporated herein by reference.
(3) the provisions of any indenture or agreement of the trust.
See (g)(1) above, which is incorporated herein by reference.
(4) the identity of the depositor, trustee or custodian.
See (g)(4) above, which is incorporated herein by reference.
(i) Any other principal feature of the securities issued by the trust
or any other principal right, privilege or obligation not covered by
subdivisions (a) to (g) or by any other item in this form.
See "Premiums" and "Allocation of Premiums and Separate Account
Value" under "The Policies"; "Policy Benefits and Rights", "General
Provisions" and "Federal Tax Matters" in the Prospectus in Exhibit D,
incorporated herein by reference.
INFORMATION CONCERNING THE SECURITIES UNDERLYING THE TRUST'S SECURITIES
11. Describe briefly the kind or type of securities comprising the unit of
specified securities in which security holders have an interest. If the trust
owns or will own any securities of its regular brokers or dealers as defined in
Rule 10b-1 under the Act, or their parents, identify those brokers or dealers
and state the value of the registrant's aggregate holdings of the securities of
each subject issuer as of the close of the registrant's most recent fiscal year.
The Owner will not be the owner of the securities held in the Separate
Account, although the value of those securities will be used to calculate
Policy benefits. The securities are owned by the Company but held in the
Separate Account pursuant to Illinois insurance laws governing the
operation of separate
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accounts. The securities held in the Separate Account will be shares of the
Fund described in Item 12. The Fund is a registered, open-end diversified
management investment company organized as a series company within the
meaning of Section 18(f)(2) of the 1940 Act. The Fund will utilize the
investment advisory services of Kemper Financial Services, Inc. ("KFS").
The investment objectives of the seven current Portfolios of the Fund are
as follows:
Money Market Portfolio seeks to provide maximum current income to the
extent consistent with stability of principal from a portfolio of high
quality money market instruments.
Total Return Portfolio seeks to obtain a high total return, a
combination of income and capital appreciation, by investing in a
combination of debt securities and common stocks.
High Yield Portfolio seeks to provide a high level of current income
by investing in fixed-income securities.
Equity Portfolio seeks to provide maximum appreciation of capital
through diversification of investment securities having potential for
capital appreciation.
Government Securities Portfolio seeks high current return consistent
with preservation of capital from a portfolio composed primarily of U.S.
Government securities.
International Portfolio seeks a total return, a combination of capital
growth and income, principally through an internationally diversified
portfolio of equity securities.
Small Cap seeks maximum appreciation of capital.
12. If the trust is the issuer of periodic payment plan certificates and if
any underlying securities were issued by another investment company, furnish the
following information for each such company:
(a) Name of Company.
Kemper Investors Fund.
(b) Name and principal business address of depositor.
Not applicable.
(c) Name and principal business address of trustee or custodian.
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
The Chase Manhattan Bank
Chase MetroTech Center
Brooklyn, New York 11245
(d) Name and principal business address of principal underwriter.
Investors Brokerage Services, Inc.
1 Kemper Drive
Long Grove, IL 60049
(e) The period during which the securities of such company have been
the underlying securities.
No underlying securities have to date been acquired by the
Separate Account.
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INFORMATION CONCERNING LOADS, FEES, CHARGES AND EXPENSES
13. (a) Furnish the following information with respect to each load, fee,
expense or charge to which (1) principal payments, (2) underlying securities,
(3) distributions, (4) cumulated or reinvested distributions or income, and (5)
redeemed or liquidated assets of the trust's securities are subject:
(A) The nature of such load, fee, expense, or charge;
(B) The amount thereof;
(C) The name of the person to whom such amounts are paid and his
relationship to the trust;
(D) The nature of the services performed by such person in
consideration for such load, fee, expense, or charge.
For sub-paragraphs (A) to (D) of this sub-item, see "Summary", and
"Charges and Deductions" in the Prospectus in Exhibit D, incorporated
herein by reference.
(b) For each installment payment type of periodic payment plan certificate
of the trust, furnish the following information with respect to sales load and
other deductions from principal payments.
See "Charges and Deductions" in the Prospectus in Exhibit D,
incorporated herein by reference.
(c) State the amount of total deductions as a percentage of the net amount
invested for each type of security issued by the trust. State each different
sales charge available as a percentage of the public offering price and as a
percentage of the net amount invested. List any special purchase plans or
methods established by rule or exemptive order that reflect scheduled variations
in, or elimination of, the sales load; and identify each class of individuals or
transactions to which such plans apply.
See (a) and (b) above, which are incorporated herein by reference.
(d) Explain fully the reasons for any difference in the price at which
securities are offered generally to the public, and the price at which
securities are offered for any class of transactions to any class or group of
individuals, including officers, directors, or employees of the depositor,
trustee, custodian, or principal underwriter.
See "Cost of Insurance Charge" and "Other Charges -- Reduction of
Charges" under "Charges and Deductions" in the Prospectus in Exhibit D,
incorporated herein by reference.
(e) Furnish a brief description of any loads, fees, expenses or charges not
covered in Item 13(a) which may be paid by security holders in connection with
the trust or its securities.
None
(f) State whether the depositor, principal underwriter, custodian or
trustee, or any affiliated person of the foregoing may receive profits or other
benefits not included in answer to Item 13(a) or 13(d) through the sale or
purchase of the trust's securities or interests in such securities, or
underlying securities or interests in underlying securities, and describe fully
the nature and extent of such profits or benefits.
None
(g) State the percentage that the aggregate annual charges and deductions
for maintenance and other expenses of the trust bear to the dividend and
interest income from the trust property during the period covered by the
financial statements filed herewith.
Not applicable since the Separate Account has not yet commenced
operations.
INFORMATION CONCERNING THE OPERATIONS OF THE TRUST
14. Describe the procedure with respect to applications (if any) and the
issuance and authentication of the trust's securities, and state the substance
of the provisions of any indenture or agreement pertaining thereto.
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See "Policy Issue" and "Premiums" under "The Policy" in the Prospectus
in Exhibit D, incorporated herein by reference.
15. Describe the procedure with respect to the receipt of payments from
purchasers of the trust's securities and the handling of the proceeds thereof,
and state the substance of the provisions of any indenture or agreement
pertaining thereto.
See "Premiums" and "Allocation of Premiums and Separate Account Value"
under "The Policy" and "Policy Benefits and Rights" in the Prospectus in
Exhibit D, incorporated herein by reference.
16. Describe the procedure with respect to the acquisition of underlying
securities and the disposition thereof, and state the substance of the
provisions of any indenture or agreement pertaining thereto.
See "The Policy -- Allocation of Premiums and Separate Account Value"
in the Prospectus in Exhibit D incorporated herein by reference.
17. (a) Describe the procedure with respect to withdrawal or redemption by
security holders.
The procedures with respect to withdrawal or redemption by security
holders are described in response to Items 10(c) and 10(d), which are
incorporated herein by reference.
(b) Furnish the names of any persons who may redeem or repurchase, or are
required to redeem or repurchase, the trust's securities or underlying
securities from security holders, and the substance of the provisions of any
indenture or agreement pertaining thereto.
See Items 10(c), 10(d) and 10(e) and 17(a) which are incorporated
herein by reference.
(c) Indicate whether repurchased or redeemed securities will be cancelled
or may be resold.
Not applicable. Separate Account assets are used to support benefits
and amounts payable under a Policy and there is no limit on the amount of
Separate Account interests that may be sold.
18. (a) Describe the procedure with respect to the receipt, custody and
disposition of the income and other distributable funds of the trust and state
the substance of the provisions of any indenture or agreement pertaining
thereto.
See "The Fund" in the Prospectus in Exhibit D, incorporated herein by
reference.
(b) Describe the procedure, if any, with respect to the reinvestment of
distributions to security holders and state the substance of the provisions of
any indenture or agreement pertaining thereto.
See "Policy Benefits and Rights -- Cash Value" in the Prospectus in
Exhibit D, incorporated herein by reference.
(c) If any reserves or special funds are created out of income or
principal, state with respect to each such reserve or fund the purpose and
ultimate disposition thereof, and describe the manner of handling of same.
The assets of the Separate Account which are allocable to the Policies
constitute a reserve for the payment of benefits under the Policies. The
general assets of the Company are also available to satisfy the Company's
contractual obligations under the Policies.
(d) Submit a schedule showing the periodic and special distributions which
have been made to security holders during the three years covered by the
financial statements filed herewith. State for each such distribution the
aggregate amount and amount per share. If distributions from sources other than
current income have been made, identify each such other source and indicate
whether such distribution represents the return of principal payments to
security holders. If payments other than cash were made, describe the nature
thereof, the account charged and the basis of determining the amount of such
charge.
Not applicable.
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19. Describe the procedure with respect to the keeping of records and
accounts of the trust, the making of reports and the furnishing of information
to security holders, and the substance of the provisions of any indenture or
agreement pertaining thereto.
The Company has responsibility for all administration of the Policies.
Under an underwriting Agreement among the Company on its own behalf and on
behalf of the Separate Account, and Investors Brokerage Services, Inc., the
Company, among other things, will maintain the records and books of the
Separate Account. It also will maintain records of the name, address,
taxpayer identification number, and other pertinent information for each
Owner and the number and type of Policy issued to each such Owner and
records with respect to the Cash Value, Surrender Value, Accumulated Unit
Value and the Death Benefit of each Policy.
See "General Provisions -- Reports and Records" in the Prospectus in
Exhibit D, incorporated herein by reference.
20. State the substance of the provisions of any indenture or agreement
concerning the trust with respect to the following:
(a) Amendments to such indenture or agreement.
Item 10(g) is incorporated herein by reference.
(b) The extension or termination of such indenture or agreement.
Item 6(a) is incorporated herein by reference.
(c) The removal or resignation of the trustee or custodian, or the
failure of the trustee or custodian to perform its duties, obligations and
functions.
Not applicable, for the reasons set forth in Item 3, which is
incorporated herein by reference.
(d) The appointment of a successor trustee and the procedure if a
successor trustee is not appointed.
Not applicable.
(e) The removal or resignation of the depositor, or the failure of the
depositor to perform its duties, obligations and functions.
There are no provisions relative to the removal or resignation of
the depositor or the failure of the depositor to perform its duties,
obligations and functions. The Company is bound under the Policies and
Illinois insurance law to carry out its obligations and those of the
Separate Account under the Policies.
(f) The appointment of a successor depositor and the procedure if a
successor depositor is not appointed.
There are no provisions relating to the appointment of a successor
depositor or the procedure if a successor depositor is not appointed.
The Company is bound under the Policies and Illinois insurance law to
carry out its obligations (including those with respect to the Separate
Account) under the Policies.
21. (a) State the substance of the provisions of any indenture or agreement
with respect to loans to security holders.
See "Policy Benefits and Rights -- Policy Loans" in the Prospectus in
Exhibit D, incorporated herein by reference.
(b) Furnish a brief description of any procedure or arrangement by which
loans are made available to security holders by the depositor, principal
underwriter, trustee or custodian, or any affiliated person of the foregoing.
The following items should be covered:
(1) The name of each person who makes such agreements or arrangements
with security holders.
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(2) The rate of interest payable on such loans.
(3) The period for which loans may be made.
(4) Costs or charges for default in repayment at maturity.
(5) Other material provisions of the agreement or arrangements.
Item 21(a) is incorporated herein by reference.
(c) If such loans are made, furnish the aggregate amount of loans
outstanding at the end of the last fiscal year, the amount of interest collected
during the last fiscal year allocated to the depositor, principal underwriter,
trustee or custodian or affiliated person of the foregoing and the aggregate
amount of loans in default at the end of the last fiscal year covered by
financial statements filed herewith.
Not applicable, since no Policies have yet been sold.
22. State the substance of the provisions of any indenture or agreement
with respect to limitations on the liabilities of the depositor, trustee or
custodian, or any other party to such indenture or agreement.
There are no such provisions.
23. Describe any bonding arrangement for officers, directors, partners or
employees of the depositor or principal underwriter of the trust, including the
amount of coverage and the type of bond.
The Company is covered by a Financial Institution Bond issued by
Federal Insurance Company for $5,000,000. Additionally, the Company is
covered by a $20,000,000 bond issued by Federal Insurance Company,
Continental Insurance Company and Gulf Insurance Company. Investors
Brokerage Services, Inc. is covered by an investment company blanket bond
issued by National Union Fire Insurance Company for $10,000,000.
24. State the substance of any other material provisions of any indenture
or agreement concerning the trust or its securities and a description of any
other material functions or duties of the depositor, trustee or custodian not
stated in Item 10 or Items 14 to 23 inclusive.
None.
III.
ORGANIZATION, PERSONNEL AND AFFILIATED PERSONS OF DEPOSITOR
ORGANIZATION AND OPERATIONS OF DEPOSITOR
25. State the form of organization of the depositor of the trust, the name
of the state or other sovereign power under the laws of which the depositor was
organized and the date of organization.
See "FKLA and the Separate Account -- Federal Kemper Life Assurance
Company" in the Prospectus in Exhibit D, incorporated herein by reference.
26. (a) Furnish the following information with respect to all fees received
by the depositor of the trust in connection with the exercise of any functions
or duties concerning securities of the trust during the period covered by the
financial statements filed herewith:
The Company has not received any such fees as yet.
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(b) Furnish the following information with respect to any fee or any
participation in fees received by the depositor from any underlying investment
company or any affiliated person or investment adviser of such company:
(1) The nature of such fee or participation.
(2) The name of the person making payment.
(3) The nature of the services rendered in consideration for such fee
or participation.
(4) The aggregate amount received during the last fiscal year covered
by the financial statements filed herewith.
(Chart omitted)
The Company has not received any such fees.
27. Describe the general character of the business engaged in by the
depositor including a statement as to any business other than that of depositor
of the trust. If the depositor acts or has acted in any capacity with respect to
any investment company or companies other than the trust, state the name or
names of such company or companies, their relationship, if any, to the trust,
and the nature of the depositor's activities therewith. If the depositor has
ceased to act in such named capacity, state the date of and circumstances
surrounding such cessation.
The Company is a life insurance company, currently authorized to do
business in 49 states and the District of Columbia.
OFFICIALS AND AFFILIATED PERSONS OF DEPOSITOR
28. (a) Furnish as at latest practicable date the following information
with respect to the depositor of the trust, with respect to each officer,
director, or partner of the depositor, and with respect to each natural person
directly or indirectly owning, controlling or holding with power to vote 5% or
more of the outstanding voting securities of the depositor.
Items 29 and 30 are incorporated herein by reference.
(b) Furnish a brief statement of the business experience during the last
five years of each officer, director or partner of the depositor.
See "Directors and Officers of FKLA" in the Prospectus in Exhibit D,
incorporated herein by reference.
COMPANIES OWNING SECURITIES OF DEPOSITOR
29. Furnish as at latest practicable date the following information with
respect to each company which directly or indirectly owns, controls or holds
with power to vote 5% or more of the outstanding voting securities of the
depositor.
As at April 30, 1994.
(Date)
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KEMPER CORPORATION
1 KEMPER DRIVE
LONG GROVE, ILLINOIS 60049
(NAME AND PRINCIPAL BUSINESS ADDRESS, NATURE OF BUSINESS)
<TABLE>
<CAPTION>
OWNERSHIP OF ALL SECURITIES OF THE DEPOSITOR
-----------------------------------------------------------------
SECURITIES OWNED SECURITIES OWNED SECURITIES OWNED
OF RECORD WHICH OF RECORD WHICH BENEFICIALLY
ARE ALSO OWNED ARE NOT OWNED WHICH ARE NOT
BENEFICIALLY BENEFICIALLY OWNED OF RECORD
------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
TITLE OF CLASS AMOUNT OF CLASS AMOUNT OF CLASS AMOUNT OF CLASS
----------------------------------------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Common................................... 136,351 100% 0 0 0 0
</TABLE>
CONTROLLING PERSONS
30. Furnish as at latest practicable date the following information with
respect to any person, other than those covered by Items 28, 29 and 42 who
directly or indirectly controls the depositor.
Not applicable.
COMPENSATION OF OFFICERS AND DIRECTORS OF DEPOSITOR
COMPENSATION OF OFFICERS OF DEPOSITOR
31. Furnish the following information with respect to the remuneration for
services paid by the depositor during the last fiscal year covered by financial
statements filed herewith:
(a) directly to each of the officers or partners of the depositor
directly receiving the three highest amounts of remuneration:
No officer, director or employee has been paid any separate
remuneration by the Company for services with respect to the Separate
Account.
(b) directly to all officers or partners of the depositor as a group
exclusive of persons whose remuneration is included under Item 31(a),
stating separately the aggregate amount paid by the depositor itself and
the aggregate amount paid by all the subsidiaries:
Item 31(a) is incorporated herein by reference.
(c) indirectly or through subsidiaries to each of the officers or
partners of the depositor:
Item 31(a) is incorporated herein by reference.
COMPENSATION OF DIRECTORS
32. Furnish the following information with respect to the remuneration for
services, exclusive of remuneration reported under Item 31, paid by the
depositor during the last fiscal year covered by financial statements filed
herewith:
(a) the aggregate direct remuneration to directors
(b) indirectly or through subsidiaries to directors
Item 31(a) is incorporated herein by reference.
COMPENSATION TO EMPLOYEES
33. (a) Furnish the following information with respect to the aggregate
amount of remuneration for services of all employees of the depositor (exclusive
of persons whose remuneration is reported in Items 31 and 32) who received
remuneration in excess of $10,000 during the last fiscal year covered by
financial statements filed herewith from the depositor and any of its
subsidiaries.
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Item 31(a) is incorporated herein by reference.
(b) Furnish the following information with respect to the remuneration for
services paid directly during the last fiscal year covered by financial
statements filed herewith to the following classes of persons (exclusive of
those persons covered by Item 33(a)): (1) Sales managers, branch managers,
district managers and other persons supervising the sale of registrant's
securities; (2) Salesmen, sales agents, canvassers and other persons making
solicitations but not in supervisory capacity; (3) Administrative and clerical
employees; and (4) Others (specify). If a person is employed in more than one
capacity, classify according to predominant type of work.
Item 31(a) is incorporated herein by reference.
COMPENSATION TO OTHER PERSONS
34. Furnish the following information with respect to the aggregate amount
of compensation for services paid any person (exclusive of persons whose
remuneration is reported in Items 31, 32 and 33), whose aggregate compensation
in connection with services rendered with respect to the trust in all capacities
exceeded $10,000 during the last fiscal year covered by financial statements
filed herewith from the depositor and any of its subsidiaries.
Not applicable, because the Separate Account has not yet commenced
operations.
IV.
DISTRIBUTION AND REDEMPTION OF SECURITIES
DISTRIBUTION OF SECURITIES
35. Furnish the names of the states in which sales of the trust's
securities (A) are currently being made, (B) are presently proposed to be made,
and (C) have been discontinued, indicating by appropriate letter the status with
respect to each state.
No sales of the Policies have been made or are currently being made.
It is presently proposed to sell the Policies in all the states, except New
York, to the extent that, and at such time as, the Company obtains
necessary regulatory clearance in such states to do so.
36. If sales of the trust's securities have at any time since January 1,
1936 been suspended for more than a month describe briefly the reasons for such
suspension.
Not applicable.
37. (a) Furnish the following information with respect to each instance
where subsequent to January 1, 1937, any Federal or state governmental officer,
agency, or regulatory body denied authority to distribute securities of the
trust, excluding a denial which was merely a procedural step prior to any
determination by such officer, etc. and which denial was subsequently rescinded.
(1) Name of officer, agency or body.
(2) Date of denial.
(3) Brief statement of reasons given for denial.
As to (1) through (3), none.
(b) Furnish the following information with regard to each instance where
subsequent to January 1, 1937, the authority to distribute securities of the
trust has been revoked by any federal or state governmental officer, agency or
regulatory body.
(1) Name of officer, agency or body.
(2) Date of revocation.
12
<PAGE> 13
(3) Brief statement of reasons given for revocation.
As to (1) through (3), none.
38. (a) Furnish a general description of the method of distribution of
securities of the trust.
See "Distribution of Policies" in the Prospectus in Exhibit D, incorporated
herein by reference.
(b) State the substance of any current selling agreement between each
principal underwriter and the trust or the depositor, including a statement as
to the inception and termination dates of the agreement, any renewal and
termination provisions, and any assignment provisions.
The Company will execute a Distribution Agreement with Investors Brokerage
Services, Inc. whereby Investors Brokerage Services, Inc. will distribute the
Policies on a best efforts basis. The agreement will be effective on the date
stipulated and will remain effective until terminated by either party upon not
less than 30 days advance written notice and may not be assigned, except by
operation of law.
See Exhibit 1-A(3)(a).
(c) State the substance of any current agreements or arrangements of each
principal underwriter with dealers, agents, salesmen, etc., with respect to
commissions, and overriding commissions, territories, franchises, qualifications
and revocations. If the trust is the issuer of periodic payment plan
certificates, furnish schedules of commissions and the bases thereof. In lieu of
a statement concerning schedules of commissions, such schedules of commissions
may be filed as Exhibit A(3)(c).
See Exhibit A(3)(c).
INFORMATION CONCERNING PRINCIPAL UNDERWRITER
39. (a) State the form of organization of each principal underwriter of
securities of the trust, the name of the state or other sovereign power under
the laws of which each underwriter was organized and the date of organization.
Investors Brokerage Services, Inc. is a corporation organized under
the laws of the State of Delaware on July 8, 1968.
(b) State whether any principal underwriter currently distributing
securities of the trust is a member of the National Association of Securities
Dealers, Inc.
Not applicable as trust is not presently distributing securities.
Investors Brokerage Services, Inc. is a member of the NASD.
40. (a) Furnish the following information with respect to all fees received
by each principal underwriter of the trust from the sale of securities of the
trust and any other functions in connection therewith exercised by such
underwriter in such capacity or otherwise during the period covered by the
financial statements filed herewith.
Not applicable, since no Policies have yet been sold.
(b) Furnish the following information with respect to any fee or any
participation in fees received by each principal underwriter from any underlying
investment company or any affiliated person or investment adviser of such
company:
(1) The nature of such fee or participation.
(2) The name of the person making payment.
(3) The nature of the services rendered in consideration for such fee
or participation.
(4) The aggregate amount received during the last fiscal year covered
by the financial statements filed herewith.
13
<PAGE> 14
The response to Item 40(a) is incorporated herein by reference. No
such fee or any participation in fees are provided for. The response to
Item 13(a) is incorporated herein by reference.
41. (a) Describe the general character of the business engaged in by each
principal underwriter, including a statement as to any business other than the
distribution of securities of the trust. If a principal underwriter acts or has
acted in any capacity with respect to any investment company or companies, their
relationship, if any, to the trust and the nature of such activities. If a
principal underwriter has ceased to act in such named capacity, state the date
of and circumstances surrounding such cessation.
Investors Brokerage Services, Inc. ("IBS") acts as a distributor of certain
other investment company shares or units. IBS is a wholly owned subsidiary of
Kemper Investors Life Insurance Company, a wholly owned subsidiary of Kemper
Financial Companies, Inc. which is 96% owned by Kemper Corporation.
(b) Furnish as at latest practicable date the address of each branch office
of each principal underwriter currently selling securities of the trust and
furnish the name and residence address of the person in charge of such office.
Not applicable, since no Policies are currently being sold.
(c) Furnish the number of individual salesman of each principal underwriter
through whom any of the securities of the trust were distributed for the last
fiscal year of the trust covered by the financial statements filed herewith and
furnish the aggregate amount of compensation received by such salesmen in such
year.
Not applicable, since no sales of Policies have yet been made.
42. Furnish as at latest practicable date the following information with
respect to each principal underwriter currently distributing securities of the
trust and with respect to each of the officers, directors or partners of such
underwriter.
Not applicable, since no Policies are currently being distributed.
43. Furnish, for the last fiscal year covered by the financial statements
filed herewith, the amount of brokerage commissions received by any principal
underwriter who is a member of a national securities exchange and who is
currently distributing the securities of the trust or effecting transactions for
the trust in the portfolio securities of the trust.
Not applicable, since no Policies have yet been sold.
OFFERING PRICE OR ACQUISITION VALUATION OF SECURITIES OF THE TRUST
44. (a) Furnish information with respect to the method of valuation used by
the trust for purposes of determining the offering price to the public of
securities issued by the trust or the valuation of shares or interests in the
underlying securities acquired by the holder of a periodic payment plan
certificate.
(1) The source of quotations used to determine the value of portfolio
securities.
Fund shares are valued at net asset value, as supplied to the
Company by the Fund or its agent.
(2) Whether opening, closing, bid, asked or any other price is used.
Not applicable.
(3) Whether price is as of the day of sale or as of any other time.
Item 16 is incorporated herein by reference.
(4) A brief description of the methods used by registrant of
determining other assets and liabilities including accrual for expenses and
taxes (including taxes on unrealized appreciation).
The Separate Account's assets and liabilities (such as charges
against the Separate Account) are valued in accordance with generally
accepted accounting principles on an accrual basis. With regard to
charges for accrual of an income tax reserve, Item 13(a) is incorporated
herein by reference.
14
<PAGE> 15
(5) Other items which registrant adds to the net asset value in
computing offering price of its securities.
Not applicable, for the reasons set forth in Item 44(b), which is
incorporated herein by reference.
(6) Whether adjustments are made for fractions:
(i) before adding distributor's compensation (load); and
(ii) after adding distributor's compensation (load).
Not applicable, because the Separate Account does not compute
per-unit values and sales loads in the manner presupposed by this Item
and Item 44(b). Appropriate adjustments will be made for fractions in
all computations.
(b) Furnish a specimen schedule showing the components of the offering
price of the trust's securities as at the latest practicable date.
Since the Separate Account has not issued any Policies, this item
cannot be answered in the way it contemplates. In return for premiums paid,
the Owners and beneficiaries have insurance coverage in the amount of the
Death Benefit under the Policy, a right to the Surrender Value of the
Policy and an interest in the Cash Value of the Policy. The manner of
calculating these benefits, rights and interests is described in Items
10(c), (d), (e) and (i), which are incorporated herein by reference. The
fees and charges to which the Policies are subject are described in Item
13, which is incorporated herein by reference, and the manner of
determining the amount of premium payments under a Policy is described in
Item 44(c), which is incorporated herein by reference.
(c) If there is any variation in the offering price of the trust's
securities to any person or classes of persons other than underwriters, state
the nature and amount of such variation and indicate the person or classes of
persons to whom such offering is made.
In setting its premium rates, the Company considers actuarial estimates of
death and cash value benefits, terminations, expenses, investment experience and
amounts to be contributed to the Company's surplus. For additional information
as to how premium rates are set, see Items 13(c) and 13(a), which are
incorporated herein by reference.
45. Furnish the following information with respect to any suspension of the
redemption rights of the securities issued by the trust during the three fiscal
years covered by the financial statements filed herewith:
(a) by whose action redemption rights were suspended.
(b) the number of days' notice given to security holders prior to
suspension of redemption rights.
(c) reason for suspension.
(d) period during which suspension was in effect.
There has been no such suspension.
REDEMPTION VALUATION OF SECURITIES OF THE TRUST
46. (a) Furnish the following information with respect to the method of
determining the redemption or withdrawal valuation of securities issued by the
trust:
(1) The source of quotations used to determine the value of portfolio
securities.
Item 44(a)(1) is incorporated herein by reference.
(2) Whether opening, closing, bid, asked or any other price is used.
Not applicable.
15
<PAGE> 16
(3) Whether price is as of the day of sale or as of any other time.
Item 44(a)(3) is incorporated herein by reference.
(4) A brief description of the methods used by registrant for
determining other assets and liabilities including accrual for expenses and
taxes (including taxes on unrealized appreciation).
Item 44(a)(4) is incorporated herein by reference.
(5) Other items which registrant deducts from the net asset value in
computing redemption value of its securities.
Item 44(a)(5) is incorporated herein by reference.
(6) Whether adjustments are made for fractions.
Item 44(a)(6) is incorporated herein by reference.
(b) Furnish a specimen schedule showing the components of the redemption
price to the holders of the trust's securities as at the latest practicable
date.
To the extent that this paragraph is applicable, see the answers to
Items 44(a) and 46(a), which are incorporated herein by reference.
PURCHASE AND SALE OF INTERESTS IN UNDERLYING SECURITIES FROM AND TO SECURITY
HOLDERS
47. Furnish a statement as to the procedure with respect to the
maintenance of a position in the underlying securities or interests in the
underlying securities, the extent and nature thereof and the person who
maintains such a position. Include a description of the procedure with
respect to the purchase of underlying securities or interests in the
underlying securities from security holders who exercise redemption or
withdrawal rights and the sale of such underlying securities and interests
in the underlying securities to other security holders. State whether the
method of valuation of such underlying securities or interests in the
underlying securities differs from that set forth in Items 44 and 46. If
any item of expenditure included in the determination of the valuation is
not or may not actually be incurred or expended, explain the nature of such
item and who may benefit from the transaction.
Item 16 is incorporated herein by reference. There is no procedure for
the purchase of underlying securities or interests therein from Owners who
exercise surrender rights.
V.
INFORMATION CONCERNING THE TRUSTEE OR CUSTODIAN
48. Furnish the following information as to each trustee or custodian of
the trust.
(a) Name and principal business address
(b) Form of organization
(c) State or other sovereign power under the laws of which the trustee
or custodian was organized.
(d) Name of governmental supervising or examining authority.
Not applicable. The Separate Account has neither trustee nor
custodian.
49. State the basis for the payment of fees or expenses of the trustee or
custodian for services rendered with respect to the trust and its securities,
and the aggregate amount thereof for the last fiscal year. Indicate the person
paying such fees or expenses. If any fees or expenses are prepaid, state the
unearned amount.
Not applicable.
16
<PAGE> 17
50. State whether the trustee or custodian or any other person has or may
create a lien on the assets of the trust, and if so, give full particulars,
outlining the substance of the provisions of any indenture or agreement with
respect thereto.
No such lien may be created.
VI.
INFORMATION CONCERNING INSURANCE OF HOLDERS OF SECURITIES
51. Furnish the following information with respect to the insurance of
holders of securities:
(a) The name and address of the insurance company.
Various insurance benefits are provided under the Policies by the
Company, the address of which is incorporated herein by reference to
Item 2.
(b) The types of policies and whether individual or group policies.
The Policies are variable life insurance contracts and are issued
on an individual basis.
(c) The types of risks insured and excluded.
The mortality and expense risk assumed is that the Company's
estimates of longevity and of the expenses incurred over the lengthy
period the Policy may be in effect -- that estimates that are the basis
for the level of other charges the Company makes under the Policy will
not be correct.
Under certain options for the payment of benefits under the
Policies, the Company assumes the risk that it will be unable to invest
the assets supporting the Policies at a return sufficient to pay the
guaranteed minimum interest rate under such options and the expenses of
administering the Policies and, in some cases, a risk that beneficiaries
under such options will live longer than anticipated.
(d) The coverage of the policies.
See "Policy Benefits and Rights" in the Prospectus in Exhibit D,
incorporated herein by reference.
(e) The beneficiaries of such policies and the uses to which the
proceeds of policies must be put.
The recipient of the benefits of the insurance undertakings
described in Item 51(c) is either the designated primary beneficiary,
any contingent beneficiaries, or the estate of the insured as stated in
the application for the Policy or as subsequently modified by the Owner.
There is no limitation on the use of the proceeds.
(f) The terms and manner of cancellation and of reinstatement.
The insurance undertakings described in Item 51(c) are integral
parts of the Policy and may not be terminated while the Policy remains
in effect, except to the extent set forth in Items 10(e) and 21(a),
which are incorporated herein by reference.
(g) The method of determining the amount of premiums to be paid by
holders of securities.
See "The Policy -- Premiums" in the Prospectus in Exhibit D,
incorporated herein by reference.
(h) The amount of aggregate premiums paid to the insurance company
during the last fiscal year.
Not applicable, since no Policies have yet been sold.
(i) Whether any person other than the insurance company receives any
part of such premiums, the name of each such person and the amount
involved, and the nature of the services rendered therefor.
Item 13(e) is incorporated herein by reference.
17
<PAGE> 18
(j) The substance of any other material provisions of any indenture or
agreement of the trust relating to insurance.
None except as disclosed in this registration statement.
VII.
POLICY OF REGISTRANT
52. (a) Furnish the substance of the provisions of any indenture or
agreement with respect to the conditions upon which and the method of selection
by which particular portfolio securities must or may be eliminated from the
assets of the trust or must or may be replaced by other portfolio securities. If
an investment adviser or other person is to be employed in connection with such
selection, elimination or substitution, state the name of such person, the
nature of any affiliation to the depositor, trustee or custodian, and any
principal underwriter, and the amount of the remuneration to be received for
such services. If any particular person is not designated in the indenture or
agreement, describe briefly the method of selection of such person.
Items 10(g) and 10(h) are incorporated herein by reference with regard
to the Company's right to substitute any other investment for shares of any
Portfolio of the Fund.
(b) Furnish the following information with respect to each transaction
involving the elimination of any underlying security during the period covered
by the financial statements filed herewith:
(1) Title of security.
(2) Date of elimination.
(3) Reasons for elimination.
(4) The use of the proceeds from the sale of the eliminated security.
(5) Title of security substituted, if any.
(6) Whether depositor, principal underwriter, trustee or custodian or
any affiliated person of the foregoing were involved in the transaction.
(7) Compensation or remuneration received by each such person directly
or indirectly as a result of the transaction.
Not applicable, since no Policies have yet been sold.
(c) Describe the policy of the trust with respect to the substitution and
elimination of the underlying securities of the trust with respect to:
(1) the grounds for elimination and substitution;
(2) the type of securities which may be substituted for any underlying
security;
(3) whether the acquisition of such substituted security or securities
would constitute the concentration of investment in a particular industry
or group of industries or would conform to a policy of concentration of
investment in a particular industry or group of industries;
(4) whether such substituted securities may be the securities of any
other investment company; and
(5) the substance of the provisions of any indenture or agreement
which authorize or restrict the policy of the registrant in this regard.
Items 10(g) and 10(h) are incorporated herein by reference.
(d) Furnish a description of any policy (exclusive of policies covered by
paragraphs (a) and (b) herein) of the trust which is deemed a matter of
fundamental policy and which is elected to be treated as such.
None.
18
<PAGE> 19
REGULATED INVESTMENT COMPANY
53. (a) State the taxable status of the trust.
See "Federal Tax Matters" in the Prospectus in Exhibit D, incorporated
herein by reference.
(b) State whether the trust qualified for the last taxable year as a
regulated investment company as defined in Section 851 of the Code, and state
its present intention with respect to such qualification during the current
taxable year.
The Separate Account has not and does not intend to so qualify.
VIII.
FINANCIAL AND STATISTICAL INFORMATION
54. If the trust is not the issuer of periodic payment plan certificates,
furnish the following information with respect to each class or series of its
securities:
Not applicable.
55. If the trust is the issuer of periodic payment certificates, a
transcript of a hypothetical account shall be filed in approximately the
following form on the basis of the certificate calling for the smallest amount
of payments. The schedule shall cover a certificate of the type currently being
sold assuming that such certificate had been sold at a date approximately ten
years prior to the date of registration or at the approximate date of
organization of the trust.
Not applicable, since no Policies have yet been sold.
56. If the trust is the issuer of period payment plan certificates, furnish
by years for the period covered by the financial statements filed herewith in
respect of certificates sold during such period, the following information for
each fully paid type of each installment payment type of periodic payment plan
certificate being issued by the trust.
Not applicable, since no Policies have yet been sold.
57. If the trust is the issuer of periodic payment plan certificates,
furnish by years for the period covered by the financial statements filed
herewith the following information for each installment payment type of periodic
payment plan certificate currently being issued by the trust.
Not applicable, since no Policies have yet been sold.
58. If the trust is the issuer of periodic payment plan certificates,
furnish the following information for each installment payment type of periodic
payment plan certificate outstanding as at the latest practicable date.
Not applicable, since no Policies have yet been sold.
59. Financial Statements:
Financial Statements of the Trust
No financial statements are filed for the Separate Account because it has
not yet commenced operation, has no assets nor liabilities, and has not received
any income nor incurred any expense.
Financial Statements of the Depositor
"Financial Statements" in the Prospectus included in Exhibit D are
incorporated herein by reference.
19
<PAGE> 20
IX.
EXHIBITS
Except as otherwise noted all exhibits are incorporated by reference to the
Registration Statement filed on Form S-6, of FKLA Variable Separate Account,
filed June 3, 1994 (File No. 33-79808).
<TABLE>
<CAPTION>
EXHIBIT NUMBER TITLE
-------------- -------------------------------------------------------------------------
<S> <C>
A(1) FKLA Resolution establishing the Separate Account
A(2) Not Applicable
**A(3)(a) Underwriting Agreement between FKLA and IBS
A(3)(b)(i) Specimen selling group agreement of KFS and General Agent Agreements of
FKLA
**A(3)(b)(ii) Addendum to selling group agreement
**A(3)(c) Schedules of commissions
**A(5) Specimen Policy
A(6)(a) FKLA Articles of Incorporation
A(6)(b) By-laws of FKLA
A(7) Not Applicable
A(8) Not Applicable
A(9) Not Applicable
**A(10) Application for policy
B Not Applicable
C Not Applicable
*D Prospectus included in Pre-Effective Amendment No. 1 to the Registration
Statement (File No. 33-79808) filed simultaneously herewith.
</TABLE>
---------------
*Attached hereto.
**Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration
Statement (File No. 33-79808) filed simultaneously herewith.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, the
depositor of the registrant has caused this amendment to the registration
statement to be duly signed on behalf of the registrant in the City of Long
Grove and the State of Illinois on the 16th day of March, 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
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBER TITLE NUMBERED PAGES
-------------- ----- --------------
<S> <C> <C>
D Prospectus included in Pre-Effective Amendment No. 1 to the
Registration Statement of FKLA Variable Separate Account (File
No. 33-79808). ...............................................
</TABLE>
<PAGE> 1
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> 2
TABLE OF CONTENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
-----
<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> 3
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> 4
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.)
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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.)
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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
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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).
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<PAGE> 8
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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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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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
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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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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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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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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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(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.
17
<PAGE> 20
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.
18
<PAGE> 21
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.
19
<PAGE> 22
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
20
<PAGE> 23
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> 24
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> 25
<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> 26
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> 27
FEDERAL KEMPER LIFE ASSURANCE COMPANY
UNAUDITED STATUTORY FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
25
<PAGE> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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
