<PAGE> 1
PROSPECTUS--JUNE 1, 1996
- --------------------------------------------------------------------------------
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 (847) 550-5500
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 20 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 available under the Policy and the Fixed
Account. Each Subaccount invests in shares of the underlying portfolio of the
Kemper Investors Fund ("Fund"). The following subaccounts are available: Money
Market, Total Return, High Yield, Growth (formerly "Equity"), Government
Securities, International and Small Cap Growth (formerly "Small Capitalization
Equity"). The other portfolios of the Fund are not currently available for
investment under the Policy. The portfolios are managed by Zurich Kemper
Investments, Inc. (formerly named "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 "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.
THE POLICIES ARE NOT INSURED BY THE FDIC. THEY ARE
OBLIGATIONS OF THE ISSUING INSURANCE COMPANY AND ARE NOT A
DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR SAVINGS
INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
------------------------------
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............................................................... 5
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........................................................................ 21
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................................................ 21
VOTING INTERESTS............................................................................ 21
STATE REGULATION OF FKLA.................................................................... 21
DIRECTORS AND OFFICERS OF FKLA.............................................................. 22
LEGAL MATTERS............................................................................... 25
LEGAL PROCEEDINGS........................................................................... 25
EXPERTS..................................................................................... 25
REGISTRATION STATEMENT...................................................................... 25
FINANCIAL STATEMENTS........................................................................ 25
APPENDICES.................................................................................. 43
</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. Chicago 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--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.)
2
<PAGE> 5
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 investment manager of the
portfolios is Zurich Kemper Investments, 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 portfolios of the Fund currently available for investment by the
Separate Account under the Policy are summarized below:
MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in twelve months or less.
TOTAL RETURN PORTFOLIO seeks 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.
GROWTH PORTFOLIO seeks 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 total return, a combination of capital growth
and income, principally through an internationally diversified portfolio of
equity securities.
SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
For a more detailed description of the Fund, see "The Fund," page 5, the
Fund prospectus, and Statement of Additional Information available upon request.
3
<PAGE> 6
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.)
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," page 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 13.)
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.
4
<PAGE> 7
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 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 is a wholly owned subsidiary of
Kemper Corporation, a non-operating holding company. Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") indirectly and directly
own 80 percent and 20 percent, respectively, of Kemper Corporation.
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 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. No funds have
been invested in the Separate Account at this time.
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, Growth (formerly
"Equity") Portfolio, Government Securities Portfolio, International Portfolio
and Small Cap Growth (formerly "Small Capitalization Equity") 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.
5
<PAGE> 8
The seven portfolios of the Fund available under the Policy in which the
Separate Account invests are summarized below:
MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in twelve months or less.
TOTAL RETURN PORTFOLIO seeks 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.
GROWTH PORTFOLIO seeks 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 total return, a combination of capital growth
and income, principally through an internationally diversified portfolio of
equity securities.
SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
There is no assurance that any of the Portfolios of the Fund will achieve
its objective as stated in the prospectus for the Fund. 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 Zurich Kemper Investments, Inc., 120
South LaSalle Street, Chicago, Illinois 60603.
Zurich Kemper Investments, Inc. ("ZKI" or the "Adviser"), an affiliate of
FKLA, is the investment manager of the portfolios. For its 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 Growth Portfolio, the Government
Securities Portfolio, the International Portfolio and the Small Cap Growth
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.
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.
6
<PAGE> 9
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.
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 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.
7
<PAGE> 10
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 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.")
8
<PAGE> 11
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. The death benefit proceeds will be equal to the death benefit minus any
debt and minus any monthly deductions due during the grace period.
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.
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
9
<PAGE> 12
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 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.
10
<PAGE> 13
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 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.")
11
<PAGE> 14
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 the
same unit value as the net asset value of a share of the underlying portfolio.
The Accumulation Unit Value for each subsequent Valuation Period is the
Investment Experience Factor for that Valuation Period 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;
(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.")
12
<PAGE> 15
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.)
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
13
<PAGE> 16
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.
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
14
<PAGE> 17
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
15
<PAGE> 18
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
16
<PAGE> 19
(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.
Because the guidance has not been published, there can be no assurance as to
content or even whether application will be prospective only. If possible, FKLA
will make modifications to the Policy to comply with such regulations.
20
<PAGE> 23
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
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>
NAME AND AGE
POSITION WITH FKLA
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ ------------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
John B. Scott (51) Chief Executive Officer and President of Federal Kemper Life
Chief Executive Officer since Assurance Company and Fidelity Life Association since 1988. Chief
February 1992. President since Executive Officer and President of Zurich Life Insurance Company
November 1993. Director since of America since January 1996. Chairman of the Board of Federal
1992. Kemper Life Assurance Company from April 1988 to January 1996.
Chairman of the Board of KILICO from February 1992 to January
1996. Executive Vice President and director of Kemper Corporation
from January 1994 and March 1996, respectively. Executive Vice
President of Kemper Financial Companies, Inc. from January 1994 to
January 1996 and Director from 1992 to January 1996.
Jerome J. Cwiok (48) Executive Vice President of Federal Kemper Life Assurance Company
Executive Vice President since and Fidelity Life Association since 1995. Executive Vice President
1995. of Zurich Life Insurance Company of America since March 1996.
Senior Vice President of KILICO, Federal Kemper Life Assurance
Company and Fidelity Life Association from 1993 to 1995. Vice
President of Federal Kemper Life Assurance Company and Fidelity
Life Association since 1993. Executive Vice President of Academy
Insurance Group from 1986 to 1993.
Eliane C. Frye (47) Executive Vice President of Federal Kemper Life Assurance Company
Executive Vice President since and Fidelity Life Association since 1995. Executive Vice President
1995. of Zurich Life Insurance Company of America since March 1996.
Senior Vice President of KILICO from 1992 to 1995. Senior Vice
President of Federal Kemper Life Assurance Company and Fidelity
Life Association from 1993 to 1995. Vice President of Federal
Kemper Life Assurance Company and Fidelity Life Association from
1988 to 1993.
Frederick L. Blackmon (43) Senior Vice President and Chief Financial Officer of Federal
Senior Vice President and Kemper Life Assurance Company and Fidelity Life Association since
Chief Financial Officer since November 1995. Treasurer and Chief Financial Officer of Kemper
November 1995. Corporation since January 1996. Senior Vice President and Chief
Financial Officer of Zurich Life Insurance Company of America
since March 1996. Chief Financial Officer of Alexander Hamilton
Life Insurance Company from April 1989 to November 1995.
James E. Hohmann (40) Senior Vice President and Chief Actuary of Federal Kemper Life
Senior Vice President and Assurance Company and Fidelity Life Association since December
Chief Actuary since December 1995. Senior Vice President and Chief Actuary of Zurich Life
1995. Insurance Company of America since March 1996. Managing Principal
(Partner) of Tillinghast--Towers Perrin from January 1991 to
December 1995. Consultant/Principal (Partner) of
Tillinghast--Towers Perrin from November 1986 to January 1991.
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH FKLA
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ ------------------------------------------------------------------
<S> <C>
Debra P. Rezabek (40) Senior Vice President of Federal Kemper Life Assurance Company and
Senior Vice President since Fidelity Life Association since 1996. General Counsel of Federal
1996. General Counsel since Kemper Life Assurance Company and Fidelity Life Association since
1992. Corporate Secretary 1992. Corporate Secretary of Federal Kemper Life Assurance Company
since January 1996. and Fidelity Life Association since January 1996. Senior Vice
President and General Counsel of Zurich Life Insurance Company of
America since March 1996. Assistant General Counsel of Federal
Kemper Life Assurance Company and Fidelity Life Association from
1988 to 1992. Assistant Secretary of KILICO, Federal Kemper Life
Assurance Company and Fidelity Life Association from 1992 to 1996.
Assistant Secretary of Kemper Corporation since January 1996.
Loren J. Alter (57) Director of Federal Kemper Life Assurance Company, Fidelity Life
Director since January 1996. Association and Zurich Kemper Investments, Inc. since January
1996. Director of Zurich Life Insurance Company of America since
May 1979. Executive Vice President of Zurich Insurance Company
since 1979. President, Chief Executive Officer and Director of
Kemper Corporation since January 1996.
William H. Bolinder (52) Chairman of the Board and Director of Federal Kemper Life
Chairman of the Board and Assurance Company and Fidelity Life Association since January
Director since January 1996. 1996. Chairman of the Board and Director of Zurich Life Insurance
Company of America since March 1995. Chairman of the Board of
Kemper Corporation since January 1996. Vice Chairman and Director
of Zurich Kemper Investments, Inc. since January 1996. Chairman of
the Board of American Guarantee and Liability Insurance Company,
Zurich American Insurance Company of Illinois, American Zurich
Insurance Company and Steadfast Insurance Company since 1986.
Chief Executive Officer of American Guarantee and Liability
Company, Zurich American Insurance Company of Illinois, American
Zurich Insurance Company and Steadfast Insurance Company from 1986
to June 1995. President of Zurich Holding Company of America since
1986. U.S. Manager of Zurich Insurance Company, U.S. Branch since
1986. Underwriter for Zurich American Lloyds since 1986.
Daniel L. Doctoroff (37) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996. Managing
Partner of Insurance Partners Advisors, L.P. since February 1994.
Vice President of Keystone, Inc. since October 1992. Managing
Director of Rosecliff Inc./Oak Hill Partners, Inc. since August
1987. Director of Bell & Howell Company since 1989; National Re
Corporation since 1990; Specialty Foods Corporation since 1993;
and Transport Holdings Inc. since 1995.
Steven M. Gluckstern (45) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996. Chairman
of the Board and Director of Zurich Kemper Investments, Inc. since
January 1996. Chairman of the Board and Chief Executive Officer of
Zurich Reinsurance Centre, Inc. since May 1993. President of
Centre Re, Bermuda from December 1986 to May 1993.
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH FKLA
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ ------------------------------------------------------------------
<S> <C>
Michael P. Stramaglia (36) Director of Federal Kemper Life Assurance Company and Fidelity
Director since January 1996. Life Association since January 1996. Chief Executive Officer and
President of Zurich Life Insurance Company of Canada since June
1994. Executive Vice-President and Chief Operating Officer of
Zurich Life Insurance Company of Canada from June 1993 to June
1994. Senior Vice-President of the Corporate Division of Zurich
Life Insurance Company of Canada from November 1990 to January
1993. Director of Zurich Life Insurance Company of Canada, Zurich
Life of Canada Holdings Limited, Zurich Indemnity Company of
Canada, Zurich Canadian Holdings Limited, and Zurmex Canada
Holdings Limited.
Paul H. Warren (40) Director of Kemper Corporation, Federal Kemper Life Assurance Com-
Director since January 1996. pany and Fidelity Life Association since January 1996. Partner of
Insurance Partners Advisors, L.P. since March 1994. Managing
Director of International Insurance Advisors since March 1992.
Vice President of J.P. Morgan from June 1986 to March 1992.
Director of Unionamerica Holdings plc since 1993; Unionamerica
Insurance Company since 1993; Tarquin plc since 1994; and Chairman
Underwriting Agencies Ltd. since 1994.
</TABLE>
24
<PAGE> 27
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, Associate 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.
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.
FKLA prepares its statutory financial statements in conformity with
accounting practices prescribed or permitted by the Department of Insurance of
the State of Illinois. Because of the effects of the differences between
generally accepted accounting principles and these statutory accounting
practices, the statutory financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of FKLA as of December 31, 1995 and 1994, and its net income
and its cash flows for each of the years in the three-year period ended December
31, 1995. However after consideration of the adjustments included in Note 1 of
FKLA's statutory financial statements, KPMG Peat Marwick LLP is of the opinion
that the adjusted capital and surplus and net income present fairly, in all
material respects, capital and surplus as of December 31, 1995 and 1994, and net
income for each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
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.
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.
25
<PAGE> 28
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, 1995 and 1994, and the related statutory statements
of operations, capital stock and surplus, and cash flow for each of the years in
the three-year period ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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. The effects on the accompanying financial statements
of the variances between such practices and generally accepted accounting
principles are described in Note 1.
In our opinion, because of the effects of the differences between generally
accepted accounting principles and the accounting practices referred to in the
preceding paragraph, the statutory financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles, the
financial position of Federal Kemper Life Assurance Company as of December 31,
1995 and 1994, and its results of operations and its cash flow for each of the
years in the three-year period ended December 31, 1995. In our opinion, however,
after consideration of the adjustments included in Note 1, the adjusted capital
stock and surplus and net income present fairly, in all material respects,
capital stock and surplus as of December 31, 1995 and 1994, and net income for
each of the years in the three-year period ended December 31, 1995 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, 1995 and
1994, and the results of its operations and its cash flow for the years then
ended, on the basis of accounting described in note 1.
KPMG Peat Marwick LLP
March 15, 1996
26
<PAGE> 29
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES, AND CAPITAL STOCK AND
SURPLUS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds, principally at amortized cost $1,820,752,935 $1,829,755,748
Stocks:
Preferred, at cost 9,413,271 9,439,057
Common, at market 2,313,842 2,844,335
Mortgage loans 167,465,730 276,598,676
Real estate 60,710 5,887,029
Policy loans 109,345,358 105,761,724
Cash 66,679,909 1,452,934
Other invested assets 36,819,957 66,336,100
Short-term investments 49,723,678 84,563,397
-------------- --------------
Total cash and invested assets 2,262,575,390 2,382,639,000
Premiums deferred and uncollected 73,812,078 76,021,986
Investment income accrued 28,296,378 36,003,534
Receivable from affiliates 23,895,116 17,682,434
Federal income tax recoverable 16,691,530 8,731,819
Other assets and receivables 21,639,969 10,649,777
Separate account assets, at market value 76,035 363,792,154
-------------- --------------
Total admitted assets $2,426,986,496 $2,895,520,704
============== ==============
LIABILITIES AND CAPITAL STOCK AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts $2,006,464,269 $2,105,662,200
Supplementary contracts without life contingencies 45,386,898 37,445,784
Policy and contract claims 31,429,007 26,835,164
Other policyholders' funds 66,646,555 48,430,611
Interest maintenance reserve -- 1,397,630
Asset valuation reserve 27,092,372 46,035,900
Real estate valuation reserve 2,799,873 15,833,633
Cost of collection in excess of loading 31,633,645 32,230,492
Accrued taxes and expenses 14,765,045 13,661,794
Other liabilities 26,596,843 24,718,422
Separate account liabilities 76,035 363,792,154
-------------- --------------
Total liabilities 2,252,890,542 2,716,043,784
-------------- --------------
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 81,257,637 86,638,603
-------------- --------------
Total capital stock and surplus 174,095,954 179,476,920
-------------- --------------
Total liabilities and capital stock and surplus $2,426,986,496 $2,895,520,704
============== ==============
</TABLE>
See accompanying notes to statutory financial statements.
27
<PAGE> 30
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Premiums and annuity considerations $299,996,378 $286,512,736 $308,149,786
Consideration for supplementary contracts 29,752,976 21,909,198 25,998,291
Investment income (net of expenses of $3,177,240,
$3,975,237 and $5,224,244 in 1995, 1994 and
1993, respectively) 165,210,467 166,397,527 161,419,695
Amortization of interest maintenance reserve (1,897,082) 2,456,160 2,360,875
Reinsurance ceding commissions and allowances 26,730,991 26,135,922 22,844,334
------------ ------------ ------------
Total income 519,793,730 503,411,543 520,772,981
------------ ------------ ------------
Benefits and expenses:
Death and other benefits 423,932,673 360,984,937 306,858,370
Increase (decrease) in aggregate reserves for
policies and supplementary contracts (91,256,817) (60,597,824) 41,312,831
Commissions 58,299,901 59,218,757 53,728,981
General expenses 37,467,455 29,293,195 26,836,092
Insurance taxes, licenses, and fees 14,601,891 11,663,019 11,387,157
------------ ------------ ------------
Total benefits and expenses 443,045,103 400,562,084 440,123,431
------------ ------------ ------------
Gain from operations before dividends to
policyholders and Federal income tax expense 76,748,627 102,849,459 80,649,550
Dividends to policyholders 74,263 74,943 83,278
------------ ------------ ------------
Gain from operations before Federal income tax
expense 76,674,364 102,774,516 80,566,272
Federal income tax expense 29,748,669 30,711,464 28,560,304
------------ ------------ ------------
Net gain from operations 46,925,695 72,063,052 52,005,968
Realized capital gains (losses):
Net realized capital gains (losses) (90,987,544) (22,346,824) 18,791,238
Related Federal income tax benefit (expense) 34,752,419 373,069 (9,399,004)
Net loss (gain) transferred to the interest
maintenance reserve 19,651,801 23,170,390 (20,201,126)
------------ ------------ ------------
Total realized capital gains (losses) (36,583,324) 1,196,635 (10,808,892)
------------ ------------ ------------
Net income $ 10,342,371 $ 73,259,687 $ 41,197,076
============ ============ ============
</TABLE>
See accompanying notes to statutory financial statements.
28
<PAGE> 31
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Capital stock--at beginning and end of year $ 2,727,020 $ 2,727,020 $ 2,727,020
------------ ------------ ------------
Paid-in surplus at beginning and end of year 90,111,297 90,111,297 90,111,297
------------ ------------ ------------
Unassigned surplus:
Balance at beginning of year 86,638,603 116,464,818 100,338,732
Net income 10,342,371 73,259,687 41,197,076
Unrealized capital gains (losses) (5,130,522) (8,253,188) 9,641,965
Change in non-admitted assets (179,259) 635,786 (53,003)
Cash dividends to Parent (13,000,000) (95,500,000) (31,682,552)
Change in asset valuation reserve 18,943,528 1,775,579 (6,160,273)
Reset of negative interest maintenance reserve (16,357,084) -- --
Noncash dividend to Parent -- -- 3,982,873
Prior period tax adjustment -- (1,744,079) (800,000)
------------ ------------ ------------
Balance at end of year 81,257,637 86,638,603 116,464,818
------------ ------------ ------------
Total capital stock and surplus $174,095,954 $179,476,920 $209,303,135
============ ============ ============
</TABLE>
See accompanying notes to statutory financial statements.
29
<PAGE> 32
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- -------------
<S> <C> <C> <C>
Cash provided (used):
From operations:
Premiums and considerations $ 331,038,287 $ 305,987,089 $ 328,933,891
Investment income received 170,536,907 172,081,442 169,823,433
Other income received 26,544,369 25,848,758 23,117,121
Benefits paid (419,972,943) (365,091,925) (305,630,269)
Commissions, other expenses, and taxes paid (108,123,222) (97,949,407) (90,627,701)
Federal income taxes paid (3,055,911) (40,388,205) (33,733,797)
Increase in policy loans (3,583,634) (4,991,357) (4,863,848)
------------- ------------- -------------
Net cash provided by (used in) operations (6,616,147) (4,503,605) 87,018,830
------------- ------------- -------------
Investments sold, matured, or repaid:
Bonds 298,350,352 989,936,952 851,873,743
Stocks 1,909,455 21,793,887 52,815,656
Mortgage loans 77,059,000 78,768,010 151,019,816
Real estate 5,258,566 2,500,380 35,076
Other invested assets 769,857 42,019,324 99,327,071
------------- ------------- -------------
Investments sold, matured, or repaid 383,347,230 1,135,018,553 1,155,071,362
------------- ------------- -------------
Other cash provided 45,929,590 15,816,221 48,498,457
------------- ------------- -------------
Total cash provided 422,660,673 1,146,331,169 1,290,588,649
------------- ------------- -------------
Cash applied:
Cost of investments acquired:
Bonds 295,948,178 993,424,320 1,033,025,829
Stocks 2,526,608 604,805 10,424,530
Mortgage loans 28,794,862 56,580,105 109,170,427
Other invested assets 18,361,481 44,118,032 25,222,333
------------- ------------- -------------
Total cost of investments acquired 345,631,129 1,094,727,262 1,177,843,119
------------- ------------- -------------
Other cash applied:
Dividends to Parent 13,000,000 95,500,000 27,699,679
Other 33,642,288 30,816,873 12,305,867
------------- ------------- -------------
Total other cash applied 46,642,288 126,316,873 40,005,546
------------- ------------- -------------
Total cash applied 392,273,417 1,221,044,135 1,217,848,665
------------- ------------- -------------
Net change in cash and short-term investments 30,387,256 (74,712,966) 72,739,984
Cash and short-term investments:
Beginning of year 86,016,331 160,729,297 87,989,313
------------- ------------- -------------
End of year $ 116,403,587 $ 86,016,331 $ 160,729,297
============= ============= =============
</TABLE>
See accompanying notes to statutory financial statements.
30
<PAGE> 33
FEDERAL KEMPER LIFE ASSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Federal Kemper Life Assurance Company (the "Company") markets a selected range
of term and interest-sensitive life insurance and annuity products primarily
through brokerage general agents and other independent distributors. The Company
is licensed in the District of Columbia and all states except New York. The
Company is a wholly-owned subsidiary of Kemper Corporation ("Kemper"). On
January 4, 1996, an investors group comprised of Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") acquired all of the
issued and outstanding common stock of Kemper. As a result of the change in
control, Zurich and Insurance Partners indirectly and directly own 80 percent
and 20 percent, respectively, of Kemper and therefore the Company.
The accompanying statutory financial statements have been prepared in accordance
with the National Association of Insurance Commissioners ("NAIC") Annual
Statement Instructions, the Accounting Practices and Procedures Manual and in
conformity with accounting practices prescribed or permitted by the Department
of Insurance of the State of Illinois, 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) 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; (4) assets and liabilities
are presented net of reinsurance in statutory basis financial statements; (5)
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; (6) the asset valuation reserve is reported as a liability rather
than as an appropriation of surplus; (7) certain assets designated as
"nonadmitted assets" (principally furniture and equipment, agents' debit
balances, and certain other classes of receivables) have been charged to
surplus; (8) annuity considerations and other fund deposits are reflected as
revenue rather than as deposits; and (9) realized capital gains/losses resulting
from changes in interest rates are deferred and amortized over the life of the
bond or mortgage sold.
31
<PAGE> 34
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
The following schedule sets forth the adjustments to statutory net income and
capital stock and surplus necessary to present them in accordance with generally
accepted accounting principles (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net income--
As reported under statutory accounting practices........... $ 10,342 $ 73,260 $ 41,197
Deferred acquisition costs................................. 37,201 43,656 24,705
Change in reserves for policies and contracts.............. (20,586) (22,174) (13,498)
Interest maintenance reserve............................... (17,755) (25,627) 17,840
Deferred income taxes...................................... (6,027) (4,032) (1,840)
Other, net................................................. (1,407) (1,262) (2,670)
--------- --------- ---------
As reported under generally accepted accounting
principles.............................................. $ 1,768 $ 63,821 $ 65,734
========= ========= =========
Capital stock and surplus--
As reported under statutory accounting practices........... $ 174,096 $ 179,477 $ 209,303
Deferred acquisition costs................................. 408,016 386,338 334,494
Reserves for policies and contracts........................ (127,840) (145,090) (112,360)
Asset valuation reserve.................................... 27,092 46,036 47,811
Due and deferred premiums.................................. (67,260) (68,021) (65,758)
Cost of collection in excess of loading.................... 31,634 32,230 31,522
Interest maintenance reserve............................... -- 1,398 27,024
Unrealized appreciation (depreciation) of investments...... 48,004 (85,556) 59,639
Deferred income taxes...................................... (59,729) (30,720) (54,386)
Other, net................................................. (7,519) (11,927) 3,747
--------- --------- ---------
As reported under generally accepted accounting
principles.............................................. $ 426,494 $ 304,165 $ 481,036
========= ========= =========
</TABLE>
The preparation of financial statements in conformity with statutory accounting
principles requires management to make estimates and assumptions that could
affect the reported amounts of assets and liabilities as well as the disclosure
of contingent assets or liabilities at the date of the financial statements. As
a result, actual results reported as revenue and expenses could differ from the
estimates reported in the accompanying financial statements. As further
discussed in the accompanying notes to the statutory financial statements,
significant estimates and assumptions affect provisions for real estate-related
losses and reserves, other than temporary declines in values for bonds, and the
calculation of fair value disclosures for certain financial instruments. The
significant statutory accounting policies follow.
ACCOUNTING PRACTICES PRESCRIBED OR PERMITTED
During 1995 the Company sold, primarily through bulk sales, approximately $84
million of real estate-related investments as part of the Company's strategic
effort to reduce its overall exposure to real estate. As a result of these sales
the Company incurred realized capital losses which were required to be
transferred to the interest maintenance reserve ("IMR"). However, as a result of
the transfer to the IMR of these realized capital losses, the IMR became
negative resulting in a net charge to unassigned surplus. In connection with the
sale of the real estate-related investments and the acquisition of Kemper, the
Department of Insurance of the State of Illinois permitted the Company to reset
the IMR to zero as of December 31, 1995. Although this treatment does not change
the Company's total amount of reported capital and surplus as of December 31,
1995, it will favorably impact the future net gain from operations and net
income as the negative IMR will not have to be amortized against future income
over the remaining lives of the investments sold.
Accounting practices prescribed by the Department of Insurance of the State of
Illinois resulted in surplus being decreased by $442 thousand as of December 31,
1994. The decrease in surplus resulted from the Company treating certain repaid
mortgages and other real estate-related loans as still held by the Company for
the purpose of calculating the asset valuation reserve ("AVR"). This treatment
resulted from a December 1993 transaction in which the Company received $59.0
million in cash and $10.2 million of new second mortgages from certain borrowers
in exchange for previously existing loans. The cash was provided by a
third-party real estate mortgage investment conduit ("REMIC") which received
from the borrowers
32
<PAGE> 35
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
first mortgages on the subject properties. While the absolute amount of loans
was substantially reduced, the Company's subordinated position on the second
mortgages resulted in the Company's overall real estate exposure being
diminished to a lesser degree. As a result, the Department of Insurance of the
State of Illinois required the Company to calculate AVR and risk-based capital
("RBC") as if the Company still held the original loans. All of these second
mortgages were paid off or sold as of December 31, 1995.
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.
INVESTED ASSETS AND RELATED INCOME
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 are carried at
cost, which approximates market value. Mortgage loans are carried at their
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 real estate-related
investments included in other invested assets, net of any applicable
write-downs, include notes receivable from real estate ventures carried at cost
and investments in real estate ventures carried at cost, adjusted for the equity
in the operating income or loss of such ventures. Policy loans are carried at
their unpaid balance. Other invested assets also include venture capital
investments, a leveraged lease and surplus notes which are carried at cost.
The amortized cost of bonds is adjusted for amortization of premiums and
accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Such amortization is
included in investment income. Amortization of the discount or premium from
mortgage-backed securities is recognized using a level effective yield method
which considers the estimated timing and amount of prepayments of the underlying
mortgage loans and is adjusted to reflect differences which arise between the
prepayments originally anticipated and the actual prepayments received and
currently anticipated. To the extent that the estimated lives of mortgage-backed
securities change as a result of changes in prepayment rates, the adjustment is
also included in investment income. The Company does not accrue interest income
on bonds, mortgage loans, or on other real estate loans where the likelihood of
collection of interest is doubtful.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, which are not
transferred to IMR as discussed below, and changes in real estate-related
reserves and write-downs are credited or charged to income, net of applicable
Federal income tax. Unrealized gains and losses are credited or charged to
surplus.
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. Prior to
year-end 1995, the Company evaluated its real estate-related assets (including
accrued interest) by estimating the probabilities of loss utilizing various
projections that included several factors relating to the borrower, property,
term of the loan, tenant composition, rental rates, other supply and demand
factors and overall economic conditions. Generally, at that time, the reserve
was 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 non-life realty companies. At year-end 1995, reflecting the
Company's change in strategy with respect to its real estate portfolio, and the
disposition thereof, real estate-related investments were valued using an
estimate of each investment's observable market price, net of estimated costs to
sell.
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
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
33
<PAGE> 36
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
mortgage loans, which are then amortized into income over the remaining lives of
the investments sold. Net deferred IMR gains are treated as a liability while
net deferred IMR losses are generally treated as a non-admitted asset with a
corresponding charge directly to unassigned surplus.
POLICY LIABILITIES
Liabilities for policy reserves on annuity contracts are calculated based on the
Commissioner's Annuity Reserve Valuation Method ("CARVM"). Interest crediting
rates guaranteed under the contracts' accumulation periods range from 4.5
percent to 8.35 percent. Guarantee periods range from one to six years with
minimum interest rate guarantees ranging from 3.0 percent to 4.5 percent.
Liabilities for policy reserves on interest-sensitive life insurance contracts
are based on statutory mortality and interest requirements without consideration
of withdrawals. Liabilities for the majority of these contracts are calculated
based on the 1980 Commissioner's Standard Ordinary ("CSO") table assuming
interest rates ranging from 4 percent to 6 percent. For contracts which have
annuitized, interest rates that are used in the determination of the present
value of future payments range from 3.0 percent to 11.25 percent.
SEPARATE ACCOUNT BUSINESS
The Company's separate accounts were for funds deposited with it on behalf of
the defined benefit retirement plans of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliated company, and certain of its subsidiaries,
Kemper and the Company. The decrease in separate account assets during 1995
reflects the transfer of certain segregated assets and liabilities related to
the pension plans of Lumbermens and the termination of the Company's and
Kemper's pension plans during 1995. The Company did not receive administrative
fees for managing such assets, and therefore the decrease in separate account
assets had no financial impact on the Company's net income. The assets of the
separate accounts are carried at market value.
FEDERAL INCOME TAXES
Federal income taxes are charged to operations based on income that is currently
payable. No credit or charge to operations is made nor asset or liability
established for the tax effect of temporary differences between financial and
tax reporting. Prior period tax adjustments are credited or charged directly to
surplus.
NON-ADMITTED ASSETS
Certain assets designated as "non-admitted assets" have been excluded from the
statements 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.
34
<PAGE> 37
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(2) INVESTED ASSETS
BONDS
The amortized cost and estimated market value of bonds at December 31, 1995 and
1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government securities..................... $ 122,676 $ 1,700 $ (13) $ 124,363
Debt securities issued by foreign
governments.................................. 37,779 1,324 (168) 38,935
Corporate and other securities................. 691,829 37,514 (3,700) 725,643
Mortgage-backed securities..................... 968,469 44,473 (865) 1,012,077
---------- ------- -------- ----------
Total bonds............................... $1,820,753 $ 85,011 $ (4,746) $1,901,018
========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government securities..................... $ 2,384 $ -- $ (137) $ 2,247
Debt securities issued by foreign
governments.................................. 31,644 -- (4,015) 27,629
Corporate and other securities................. 781,202 6,342 (48,900) 738,644
Mortgage-backed securities..................... 1,014,526 220 (43,566) 971,180
---------- ------- -------- ----------
Total bonds............................... $1,829,756 $ 6,562 $ (96,618) $1,739,700
========== ======= ======== ==========
</TABLE>
The amortized cost and estimated market value of bonds at December 31, 1995, 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.............................................. $ 7,907 $ 8,054
Due after one year through five years................................ 247,009 258,972
Due after five years through ten years............................... 472,325 493,241
Due after ten years.................................................. 125,043 128,674
Securities not due at a single maturity date--primarily
mortgage-backed securities(1)...................................... 968,469 1,012,077
---------- ----------
Total bonds..................................................... $1,820,753 $1,901,018
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 5.5 years.
Mortgage-backed securities consist primarily of marketable mortgage pass-through
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association, or the Federal Home Loan Mortgage Corporation and
other investment-grade securities collateralized by mortgage pass-through
securities issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally of AAA
credit quality and the markets for these investments have been and are expected
to remain liquid.
Future investment income from mortgage-backed securities may be affected by the
timing of principal payments and the yields on reinvestment alternatives
available at the time of such payments. Due to the
35
<PAGE> 38
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
fact that the Company's investments in mortgage-backed securities predominately
date from recent years, the current interest rate environment is not expected to
cause any material extension of the average maturities of these investments.
Prepayment activity on securities purchased at a discount is not expected to
result in any material losses to the Company because prepayments would generally
accelerate the reporting of the discounts as investment income. Prepayment
activity resulting from a decline in interest rates on such securities purchased
at a premium would accelerate the amortization of the premiums which would
result in reductions of investment income related to such securities. At
December 31, 1995, the Company had unamortized discounts and premiums of $20.2
million and $479 thousand, respectively, related to mortgage-backed securities.
Given the credit quality, liquidity and anticipated payment characteristics of
the Company's investments in mortgage-backed securities, the Company believes
that the associated risk can be managed without material adverse consequences to
its financial statements.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 14 issuers at December 31, 1995, totaled 2.0 percent
of cash and invested assets at December 31, 1995, compared with 3.0 percent at
December 31, 1994. 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.
Proceeds from sales of investments in bonds during 1995 were $298.4 million.
Gross gains of $11.3 million and gross losses of $515 thousand were realized on
those sales. Proceeds from sales of investments in bonds during 1994 were $989.9
million. Gross gains of $6.1 million and gross losses of $41.9 million were
realized on those sales. 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.
Bonds with amortized values of $2.5 million were on deposit with governmental
authorities as required by law at December 31, 1995.
EQUITY SECURITIES
The market value of preferred stock was $10.5 million and $9.3 million at
December 31, 1995 and 1994, respectively. The cost of common stock was $1.7
million and $1.3 million at December 31, 1995 and 1994, respectively.
REAL ESTATE-RELATED INVESTMENTS
The Company's real estate portfolio 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 following table summarizes the Company's real estate-related investments at
December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Commercial mortgages...................................................... $167,466 $276,599
Real estate-related bonds................................................. 2,177 7,966
Real estate-related stocks................................................ 850 2,665
Real estate-related investments included in other invested assets:
Real estate loans and notes receivable.................................. 5,929 24,326
Real estate joint ventures and partnerships............................. 11,114 27,252
Real estate............................................................... 61 5,887
Real estate valuation reserve............................................. (2,800) (15,834)
-------- --------
Total(1)............................................................. $184,797 $328,861
======== ========
</TABLE>
- ---------------
(1) Excludes $2.1 million and $9.5 million of real estate-related accrued
interest at December 31, 1995 and 1994, respectively.
36
<PAGE> 39
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, total impaired loans amounted to $9.4 million and
$54.9 million, respectively. Impaired loans had corresponding reserves of $2.8
million and $9.3 million at December 31, 1995 and 1994, respectively.
The Company had an average balance of $53.3 million and $63.9 million in
impaired loans for 1995 and 1994, respectively. Cash payments received on
impaired loans are generally applied to reduce the outstanding loan balance. At
December 31, 1995 and 1994, loans on nonaccrual status amounted to $11.4 million
and $84.7 million, respectively. Impaired loans are generally included in the
Company's nonaccrual loans.
(3) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio, however, certain concentrations of credit risk exist in
mortgage-backed securities (see note captioned "Invested Assets") and real
estate. The Company's real estate portfolio is distributed by geographic
location and property type as shown in the following two tables:
Geographic distribution as of December 31, 1995:
<TABLE>
<S> <C>
Illinois................................................................................. 54.9%
California............................................................................... 20.4
Texas.................................................................................... 5.7
Hawaii................................................................................... 4.8
Florida.................................................................................. 4.7
Oregon................................................................................... 2.4
Washington............................................................................... 2.1
Other(1)................................................................................. 5.0
-----
Total............................................................................... 100.0%
=====
</TABLE>
- ---------------
(1) No other single location exceeded 2.0 percent.
Distribution by property type as of December 31, 1995:
<TABLE>
<S> <C>
Office................................................................................... 53.8%
Hotel.................................................................................... 14.2
Land..................................................................................... 10.4
Apartment................................................................................ 5.5
Retail................................................................................... 5.1
Other.................................................................................... 11.0
-----
Total............................................................................... 100.0%
=====
</TABLE>
Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. California real estate market
conditions have continued to be worse than in many other areas of the country.
Real estate markets in northern California and Illinois currently reflect some
stabilization and improvement.
Undeveloped land represented approximately 10.4 percent of the Company's real
estate portfolio at December 31, 1995. To maximize the value of certain land and
other projects, additional development has been proceeding or has been planned.
Such development of existing projects would continue to require funding, either
from the Company or third parties. In the present real estate markets,
third-party financing can require credit enhancing arrangements (e.g., standby
financing arrangements and loan commitments) from the Company. The values of
development projects are dependent on a number of factors, including Kemper's
and the Company's plans with respect thereto, obtaining necessary permits and
market demand for the permitted use of the property. The values of certain
development projects have been written down as of December 31, 1995, reflecting
changes in plans in connection with the Zurich-led acquisition of Kemper. There
can be no assurance that such permits will be obtained as planned or at all, nor
that such expenditures will occur as scheduled, nor that Kemper's and the
Company's plans with respect to such projects may not change substantially.
37
<PAGE> 40
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
The majority of the Company's real estate loans are on properties or projects
where the Company, Kemper, or their respective affiliates have taken ownership
positions in joint ventures with a small number of partners.
At December 31, 1995, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates, totaled approximately $80.3 million, or
43.5 percent, of the Company's real estate portfolio. Prime Group-related
commitments accounted for $13.0 million of the off-balance-sheet legal
commitments at December 31, 1995, of which the Company expects to fund $3.5
million.
At December 31, 1995, loans to and investments in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens,
constituted approximately $22.5 million or 12.2 percent of the Company's real
estate portfolio. The Company's interest in the MLP is a less than one percent
limited partnership interest, and Kemper's interest is 75 percent at December
31, 1995. Prior to 1995, Kemper's interest was 50 percent. At December 31, 1995,
MLP-related commitments accounted for approximately $23.8 million of the
Company's off-balance-sheet legal commitments, of which the Company expects to
fund $5.3 million.
At December 31, 1995, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt") have interests constituted
approximately $17.5 million, or 9.5 percent of the Company's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1995, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
(4) FEDERAL INCOME TAXES
The actual Federal income tax expense on operations for 1995, 1994 and 1993
differed from "expected" tax expense ("expected" tax is computed by applying the
corporate tax rate of 35 percent to gain from operations before Federal income
tax expense for 1995, 1994 and 1993) as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense.................................... $26,836 $35,971 $28,198
Proxy tax on insurance acquisition costs........................... 5,495 4,637 4,942
Change in statutory reserves over tax reserves..................... (1,196) 337 (688)
Adjustment of prior year accrual................................... (3,430) (8,896) (6,408)
Lease agreement.................................................... (809) (1,003) (1,475)
Other, net......................................................... 2,853 (335) 3,991
------- ------- -------
Total Federal income tax expense................................... $29,749 $30,711 $28,560
======= ======= =======
</TABLE>
The operations of the Company are included in the consolidated Federal income
tax return of Kemper. 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.
(5) 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 its risk and limit its 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.
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 life
insurance company. Beginning in 1992, the Company began to reinsure the excess
of insurance risks over
38
<PAGE> 41
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
the Company's retention limits with other unaffiliated insurance companies,
primarily American United Life Insurance Company. At December 31, 1995 and 1994,
the deductions for reinsurance ceded to FLA and other unaffiliated insurance
companies were as follows (in millions):
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Reserves ceded to FLA........................................................ $38.2 $42.4
Reserves ceded to unaffiliated insurance companies........................... 24.5 20.4
----- -----
Total reserves ceded......................................................... $62.7 $62.8
===== =====
Premiums ceded to FLA........................................................ $41.6 $45.3
Premiums ceded to unaffiliated insurance companies........................... 42.7 35.5
----- -----
Total premiums ceded......................................................... $84.3 $80.8
===== =====
</TABLE>
Such amounts related to life insurance in force at December 31, 1995 and 1994 as
follows (in billions):
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Direct and assumed........................................................... $98.0 $95.9
===== =====
Ceded to:
FLA........................................................................ $11.6 $13.6
Unaffiliated insurance companies........................................... 17.2 15.2
</TABLE>
(6) EMPLOYEE BENEFIT PLANS
Prior to November 30, 1994, the Company actively maintained a defined benefit
pension plan. The plan was noncontributory and benefits were based upon an
employee's career average benefit accrual, with an alternative minimum benefit
formula based upon years of participation and final average pay. Vesting
occurred after five years of service. The Company's funding policy for qualified
pension plans was to contribute, at a minimum, the equivalent of the amount
required under the Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code. At November 30, 1994, the Company's retirement plan
ceased accruing benefits and all employees participating in the plan became
fully vested. During 1995, the Company's employees received their vested
benefits in connection with the termination of the plan as either a lump-sum
payment or a nonparticipating annuity contract issued by a third-party insurance
company.
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, 1995,
1994 and 1993 amounted to $553 thousand, $338 thousand and $57 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 with
respect to medical benefits and the plan is not funded except with respect to
certain disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
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 $500 thousand as of December 31, 1995.
Net postretirement benefit costs for the years ended December 31, 1995 and 1994
amounted to $233 thousand and $132 thousand, respectively, and include the
expected cost of such benefits for newly
39
<PAGE> 42
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
eligible or vested employees, interest cost, gains and losses arising from
differences between actuarial assumptions and actual experience, and
amortization of the transition obligation.
At December 31, 1995 and 1994, the accumulated and unfunded postretirement
benefit obligation for retirees and other fully eligible or vested participants
was $331 thousand and $264 thousand, respectively. The discount rate used in
determining the allocated postretirement benefit obligation was 7.25 percent and
8 percent in 1995 and 1994, respectively. The health care trend rate was based
on projected experience for 1995 and 1996, 10 percent in 1997, gradually
declining to 6 percent by the year 2000, and remaining at that level thereafter.
A one percentage point increase in assumed health care cost trend rate for each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 and 1994 by $125 thousand and $92 thousand, respectively, and
the net postretirement benefit health care interest and service costs for the
years ended December 31, 1995 and 1994 by $20 thousand and $10 thousand,
respectively.
(8) RELATED-PARTY TRANSACTIONS
During 1995, 1994, and 1993 the Company paid cash dividends to Kemper of $13.0
million, $95.5 million, and $31.7 million, respectively.
The Company shares its employees and certain operations with FLA and Kemper
Investors Life Insurance Company ("KILICO"), an affiliated company. The Company
allocates expenses for the utilization of its employees and certain facilities
to KILICO based upon KILICO's share of administrative, legal, marketing, and
operation and support services. The Company has a formal management services
agreement with FLA which charges FLA based upon certain fixed and variable
charges. Expenses allocated to KILICO during 1995, 1994 and 1993 amounted to
$14.3 million, $11.1 million and $13.1 million, respectively. Expenses charged
to FLA during 1995, 1994, and 1993 under the terms of the agreement, amounted to
$8.6 million, $9.0 million and $7.2 million, respectively. The Company is also
charged investment management fees from the Company's portfolio manager, Zurich
Kemper Investors, Inc. ("ZKI"), an affiliated company, which amounted to $2.1
million during both 1995 and 1994 and $2.7 million during 1993.
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
$41.6 million and $7.6 million in 1995, $45.3 million and $8.0 million in 1994,
and $44.2 million and $8.2 million in 1993, respectively.
The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1995 and 1994, joint venture mortgage loans
totaled approximately $118.4 million and $189.0 million, respectively. During
1995, 1994, and 1993 the Company earned interest income on these joint venture
loans of $8.8 million, $7.5 million, and $20.6 million respectively.
During 1995, 1994, and 1993 the Company sold $1.4 million, $68.8 million and
$103.4 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.
(9) CAPITAL STOCK AND SURPLUS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted if such dividend, together with other
distributions during the twelve preceding months would exceed the greater of ten
percent of statutory surplus as regards policyholders as of the preceding
December 31, or statutory net income for the preceding calendar year. If the
limitation is exceeded, then such proposed dividend must be reported to the
Director of Insurance at least 30 days prior to the proposed payment date and
may be paid only if not disapproved. Illinois insurance laws also permit payment
of dividends only out of earned surplus, exclusive of most unrealized capital
gains. The maximum amount of dividends which can be paid by the Company without
prior approval in 1996 is $17.4 million. The Company paid dividends of $13.0
million and $95.5 million during 1995 and 1994, respectively.
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
40
<PAGE> 43
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
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 capital levels substantially exceeding
any which would mandate action under the risk-based capital rules and is in
compliance with applicable asset adequacy rules.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the Company's financial
statements.
Although none of the Company or its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of or lending to real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned or properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's and Kemper's receipt and
review of environmental reports on most of the projects in which it is involved,
the Company believes its environmental exposure would be immaterial to its
results of operations. However, the Company may be required in the future to
take actions to remedy environmental exposures, and there can be no assurance
that material environmental exposures will not develop or be identified in the
future. The amount of future environmental costs is impossible to estimate due
to, among other factors, the unknown magnitude of possible exposures, the
unknown timing and extent of corrective actions that may be required, the
determination of the Company's liability in proportion to others and the extent
such costs may be covered by insurance or various environmental indemnification
agreements.
At December 31, 1995, the Company had loan commitments and stand-by financing
agreements totaling $47.1 million to support the financing needs of various real
estate investments. To the extent these arrangements are called upon, amounts
loaned would be secured by assets of the joint ventures, including first
mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $19.2 million
of these arrangements. The disparity between total legal commitments and the
amount expected to be funded relates principally to standby financing
arrangements that provide credit enhancements to certain tax-exempt bonds, which
the Company does not presently expect to fund. 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 is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1995 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders. Accrued
guaranty fund assessments amounted to $4.7 million and $1.6 million as of
December 31, 1995 and 1994, respectively. The Company is also contingently
liable for any future guaranty fund assessments related to insolvencies of
unaffiliated insurance companies, for which the life insurance industry has been
unable to estimate the cost to cover losses to policyholders. No specific amount
can be reasonably estimated for such insolvencies as of December 31, 1995.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated using assumptions that management believes are appropriate, changes
in assumptions could significantly affect the estimates and such estimates
should be used with care.
41
<PAGE> 44
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Bonds: Fair values for bonds were determined by using market quotations, or
independent pricing services that use prices provided by market makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics, or fair value as determined in good
faith by the Company's portfolio manager, ZKI.
Equity securities: Fair values for equity securities were based upon quoted
market prices.
Cash and short-term investments: The carrying amounts reported for these
instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments for year-end 1994 were
estimated on a project-by-project basis. Generally, the projected cash flows of
the collateral were discounted using a discount rate of 10 to 12 percent. The
resulting collateral estimates were then used to determine the value of the
Company's real estate-related investments. Fair values for mortgage loans and
other real estate-related investments for year-end 1995 were estimated based
upon each investment's observable market price, net of estimated costs to sell.
The estimate of fair value should be used with care given the inherent
difficulty of estimating the fair value of real estate due to the lack of a
liquid quotable market.
Other loans and investments: The fair values of policy loans were estimated by
discounting the expected future cash flows using an interest rate charged on
policy loans for similar policies currently being issued. The fair values for
other invested assets were primarily based upon quoted market prices.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1995 and 1994 to be 5.0 percent and 5.5 percent,
respectively, while the assumed average market crediting rate was 5.5 percent in
1995 and 6.5 percent in 1994.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Bonds........................................ $1,820,753 $1,901,018 $1,829,756 $1,739,700
Equity securities............................ 11,727 12,843 12,283 12,101
Cash and short-term investments.............. 116,404 116,404 86,016 86,016
Mortgage loans and other real estate-related
investments............................... 184,797 184,797 328,861 271,093
Policy loans................................. 109,345 109,345 105,762 105,762
Other invested assets (excluding real estate-
related investments)...................... 19,777 15,705 14,758 14,758
Financial instruments recorded as liabilities--
aggregate reserves for policies and
supplementary contracts excluding term and
ordinary life reserves....................... $1,959,373 $1,835,838 $1,953,397 $1,831,339
</TABLE>
42
<PAGE> 45
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). 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.
43
<PAGE> 46
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.
44
<PAGE> 47
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.
45
<PAGE> 48
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.
46
<PAGE> 49
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.
47
<PAGE> 50
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
48
