<PAGE>   1
 
   
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1999
    
                                                      REGISTRATION NO. 333-02491
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM S-1
 
   
                               AMENDMENT NO. 4 TO
    
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                    KEMPER INVESTORS LIFE INSURANCE COMPANY
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
   
<TABLE>
<S>                                                <C>
                   Illinois                                          36-3050975
           -------------------------                               ---------------
        (State or other jurisdiction of                           (I.R.S. Employer
        incorporation or organization)                           Identification No.)
                1 Kemper Drive
          Long Grove, Illinois 60049
                (847) 550-5500                                          6312
-----------------------------------------------    -----------------------------------------------
  (Address, including zip code, and telephone               (Primary Standard Industrial
                    number,                                  Classification Code Number)
including area code, of registrant's principal
              executive offices)
                                      Debra P. Rezabek, Esq.
                             Kemper Investors Life Insurance Company
                                          1 Kemper Drive
                                    Long Grove, Illinois 60049
                                          (847) 969-3506
--------------------------------------------------------------------------------------------------
                    (Name, address, including zip code, and telephone number,
                            including area code, of agent for service)
                                            COPIES TO:
             Frank J. Julian, Esq.                               Joan E. Boros, Esq.
    Kemper Investors Life Insurance Company                       Jorden Burt Boros
                1 Kemper Drive                              Cicchetti Berenson & Johnson
          Long Grove, Illinois 60049                     1025 Thomas Jefferson Street, N.W.
                                                                     Suite 400E
                                                               Washington, D.C. 20007
</TABLE>
    
 
                               ------------------
 
Approximate date of commencement of proposed sale to the public: as soon as
practicable, after this Amendment becomes effective.
 
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box.  [X]
 
                               ------------------
 
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus contained
herein also relates to Registration Statements No. 33-33547, No. 33-43462 and
No. 33-46881.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2
 
                    KEMPER INVESTORS LIFE INSURANCE COMPANY
 
                             CROSS REFERENCE SHEET
                    PURSUANT TO REGULATION S-K, ITEM 501(B)
 
   
<TABLE>
<CAPTION>
FORM S-1
ITEM NO.                 FORM S-1 CAPTION                             CAPTION IN PROSPECTUS
--------                 ----------------                             ---------------------
<C>         <S>                                            <C>
   1.       Forepart of the Registration Statement and
            Outside Front Cover Page of Prospectus.....    Facing Page and Outside Front Cover Page of
                                                           Prospectus.
   2.       Inside Front and Outside Back Cover Pages
            of Prospectus..............................    Table of Contents.
   3.       Summary Information, Risk Factors and Ratio
            of Earnings to Fixed Charges...............    Summary; Not Applicable as to Ratio of
                                                           Earnings to Fixed Charges.
   4.       Use of Proceeds............................    KILICO, The MVA Option, The Separate
                                                           Account and The Fund--The MVA Option;
                                                           Business--Investments.
   5.       Determination of Offering Price............    Not Applicable.
   6.       Dilution...................................    Not Applicable.
   7.       Selling of Security Holders................    Not Applicable.
   8.       Plan of Distribution.......................    Distribution of Contracts and Certificates
   9.       Description of Securities to be
            Registered.................................    Summary; The Certificates; The Accumulation
                                                           Period; Certificate Charges and Expenses.
  10.       Interests of Named Experts and Counsel.....    Experts; Legal Matters.
  11.       Information with Respect to the
            Registrant.................................    Federal Tax Matters; Business; Management's
                                                           Discussion and Analysis of Financial
                                                           Condition and Results of Operations; Legal
                                                           Proceedings; Financial Statements of Kemper
                                                           Investors Life Insurance Company and
                                                           Subsidiaries.
  12.       Disclosure of Commission Position of
            Indemnification For Securities Act
            Liabilities................................    Part II, Item 17.
</TABLE>
    
<PAGE>   3
 
   
                                 PROSPECTUS FOR
    
   
                    KEMPER INVESTORS LIFE INSURANCE COMPANY
    
--------------------------------------------------------------------------------
 
   
             INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
    
   
                      ADJUSTED DEFERRED ANNUITY CONTRACTS
    
--------------------------------------------------------------------------------
 
   
                                KEMPER PASSPORT
    
   
                                   ISSUED BY
    
   
                    KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
    
   
                                      AND
    
   
                    KEMPER INVESTORS LIFE INSURANCE COMPANY
    
 
   
This prospectus describes Variable and Market Value Adjusted Deferred Annuity
Contracts of Kemper Investors Life Insurance Company that are designed to
provide benefits under retirement plans which may qualify for certain federal
tax advantages. Depending on particular state requirements, the Contracts may be
issued on a group or individual basis. Contracts issued on an individual basis
are represented by a Certificate. All discussion of "Contracts" includes issued
on an individual or group basis.
    
 
   
You may allocate purchase payments to one or more of the variable options, the
fixed option or the fixed option subject to a market value adjustment. The
Contract currently offers sixteen investment options, each of which is a
Subaccount of KILICO Variable Annuity Separate Account. Currently, you may
choose among the following Portfolios of the Kemper Variable Series (formerly
Investors Fund Series): Kemper Money Market, Kemper Total Return, Kemper High
Yield, Kemper Growth, Kemper Government Securities, Kemper International, Kemper
Small Cap Growth, Kemper Investment Grade Bond, Kemper Contrarian Value, Kemper
Small Cap Value, Kemper Value + Growth, Kemper Horizon 20+, Kemper Horizon 10+,
Kemper Horizon 5, Kemper Blue Chip and Kemper Global Income.
    
 
   
The Contracts are not issued by the FDIC. They are obligations of the issuing
insurance company and not a deposit of, or guaranteed by, any bank or savings
institution and are subject to risks, including possible loss of principal.
    
 
   
This prospectus contains important information about the Contracts that you
should know before investing. You should read it before investing and keep it
for future reference. We have filed a Statement of Additional Information
("SAI") with the Securities and Exchange Commission. The current SAI has the
same date as this prospectus and is incorporated by reference in this
prospectus. You may obtain a free copy by writing us or calling (847) 550-5500.
A table of contents for the SAI appears on page 66. You may also find this
prospectus and other information about the separate account required to be filed
with the Securities and Exchange Commission ("SEC") at the SEC's web site at
http://www.sec.gov.
    
 
   
The date of this prospectus is May 1, 1999.
    
 
   
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
    
<PAGE>   4
 
TABLE OF CONTENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
DEFINITIONS.................................................    1
SUMMARY.....................................................    3
SUMMARY OF EXPENSES.........................................    5
CONDENSED FINANCIAL INFORMATION.............................    7
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND...    8
THE CONTRACTS...............................................   12
THE ACCUMULATION PERIOD.....................................   13
CONTRACT CHARGES AND EXPENSES...............................   19
THE ANNUITY PERIOD..........................................   22
FEDERAL INCOME TAXES........................................   26
DISTRIBUTION OF CONTRACTS AND CERTIFICATES..................   33
VOTING RIGHTS...............................................   33
REPORTS TO OWNERS AND INQUIRIES.............................   33
DOLLAR COST AVERAGING.......................................   34
SYSTEMATIC WITHDRAWAL PLAN..................................   35
EXPERTS.....................................................   35
LEGAL MATTERS...............................................   35
SPECIAL CONSIDERATIONS......................................   35
AVAILABLE INFORMATION.......................................   36
BUSINESS....................................................   37
PROPERTIES..................................................   44
LEGAL PROCEEDINGS...........................................   44
SELECTED FINANCIAL DATA.....................................   45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS.................................   46
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS...................   61
EXECUTIVE COMPENSATION......................................   64
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION......   66
FINANCIAL STATEMENTS........................................   66
CHANGE OF ACCOUNTANTS.......................................   66
FINANCIAL STATEMENTS OF KEMPER INVESTORS LIFE INSURANCE
  COMPANY AND SUBSIDIARIES..................................   69
APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT........   98
APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED
  FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA
  DISCLOSURE STATEMENT......................................  101
</TABLE>
    
<PAGE>   5
 
DEFINITIONS
 
The following terms as used in this Prospectus have the indicated meanings:
 
     ACCUMULATED GUARANTEE PERIOD VALUE--The sum of an Owner's Guarantee Period
     Values.
 
     ACCUMULATION PERIOD--The period between the Date of Issue of a Certificate
     and the Annuity Date.
 
     ACCUMULATION UNIT--A unit of measurement used to determine the value of
     each Subaccount during the Accumulation Period.
 
     ALLOCATION OPTION--The seventeen Subaccounts and the MVA Option available
     under the Certificate for allocation of Purchase Payments, or transfers of
     Certificate Value during the Accumulation Period.
 
     ANNUITANT--The person designated to receive or who is actually receiving
     annuity payments and upon the continuation of whose life annuity payments
     involving life contingencies depend.
 
     ANNUITY DATE--The date on which annuity payments are to commence.
 
     ANNUITY OPTION--One of several forms in which annuity payments can be made.
 
     ANNUITY PERIOD--The period starting on the Annuity Date.
 
     ANNUITY UNIT--A unit of measurement used to determine the amount of
     Variable Annuity payments.
 
   
     BENEFICIARY--The person designated to receive any benefits under a Contract
     upon the death of the Annuitant or the Owner prior to the Annuity Period.
    
 
   
     CERTIFICATE--An individual certificate of participation issued by Us to
     each Owner in a group as evidence of his or her rights and benefits under
     the Contract or an individual contract issued by Us to an Owner.
    
 
   
     CONTRACT VALUE--The sum of the values of the Owner's or Certificate
     holder's Accumulated Guarantee Period Value and Separate Account Value
     during the Accumulation Period.
    
 
   
     COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
     Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
     60049.
    
 
   
     CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
     Certificate.
    
 
   
     CONTRACT--A Variable and Market Value Adjusted Deferred Annuity Contracts
     offered on an individual or group basis.
    
 
   
     DATE OF ISSUE--The date on which the first Contract Year commences.
    
 
   
     FIXED ANNUITY--An annuity under which the amount of each annuity payment
     does not vary with the investment experience of a Subaccount and is
     guaranteed by Us.
    
 
   
     FUND--Kemper Variable Series (formerly Investors Fund Series), an open-end
     management investment company. The Separate Account invests in sixteen
     portfolios of the Fund.
    
 
   
     GENERAL ACCOUNT--All Our assets other than those allocated to any legally
     segregated separate account.
    
 
   
     GUARANTEED INTEREST RATE--The rate of interest established by Us for a
     given Guarantee Period.
    
 
     GUARANTEE PERIOD--A period of time during which an amount is to be credited
     with a Guaranteed Interest Rate. Guarantee Period options may have
     durations of from one (1) to ten (10) years, as elected by the Owner.
 
     GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of the
     Owner's: (1) Purchase Payment allocated or amount transferred to a
     Guarantee Period; plus (2) interest credited; minus (3) withdrawals,
     previously assessed Withdrawal Charges and transfers; and (4) as adjusted
     for any applicable Market Value Adjustment previously made.
 
   
     MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
     value adjustment formula on any date prior to the end of a Guarantee
     Period.
    
 
                                        1
<PAGE>   6
 
   
     MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
     in accordance with the market value adjustment formula prior to the end of
     that Guarantee Period. The adjustment reflects the change in the value of
     the Guarantee Period Value due to changes in interest rates since the date
     the Guarantee Period commenced. The adjustment is computed using the market
     value adjustment formula stated in the Contract.
    
 
   
     NON-QUALIFIED CONTRACT--A Contract issued in connection with a retirement
     plan which does not receive favorable tax treatment under Section 401, 403,
     408, 408A or 457 of the Internal Revenue Code.
    
 
   
     OWNER--The person designated in the Certificate as having the privileges of
     ownership defined in the Contract.
    
 
   
     PURCHASE PAYMENTS--Amounts paid to Us by or on behalf of the Owner.
    
 
   
     QUALIFIED CONTRACT--A Certificate issued in connection with a retirement
     plan which receives favorable tax treatment under Section 401, 403, 408,
     408A or 457 of the Internal Revenue Code.
    
 
   
     SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
    
 
     SEPARATE ACCOUNT VALUE--The sum of the Owner's Subaccount values.
 
   
     SKI--Scudder Kemper Investments, Inc., whose Corporate Headquarters is at
     345 Park Avenue, New York, New York 10154-0010.
    
 
     SUBACCOUNTS--The seventeen subdivisions of the Separate Account, the assets
     of which consist solely of shares of the corresponding portfolio of the
     Fund.
 
     SUBACCOUNT VALUE--The value of the Owner's interest in each Subaccount.
 
     VALUATION DATE--Each day when the New York Stock Exchange is open for
     trading, as well as each day otherwise required.
 
     VALUATION PERIOD--The interval of time between two consecutive Valuation
     Dates.
 
   
     VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
     with the investment experience of the Subaccount(s) in which the Owner's
     Contract has an interest.
    
 
     WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
     certain withdrawals of Certificate Value in the first six Certificate Years
     after a Purchase Payment is made or against certain annuitizations of
     Certificate Value in the first six Certificate Years after a Purchase
     Payment is made.
 
     ZIML--Zurich Investment Management Limited, whose Home Office is 1 Fleet
     Place, London, U.K. EC4M7RQ.
 
                                        2
<PAGE>   7
 
                                    SUMMARY
 
   
Because this is a summary, it does not contain all of the information that may
be important. Read the entire Prospectus and Statement of Additional Information
before deciding to invest.
    
 
   
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified and Qualified Contracts are described in this
Prospectus.
    
 
   
The minimum initial Purchase Payment is $2,000 and, subject to certain
exceptions, the minimum subsequent payment is $500. An allocation to a
Subaccount, Fixed Account or Guarantee Period must be at least $500.
    
 
   
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts selected by the Owner. Each Subaccount invests in one
of the following corresponding Portfolios:
    
 
   
- Kemper Money Market
    
 
   
- Kemper Total Return
    
 
   
- Kemper High Yield
    
 
   
- Kemper Growth
    
 
   
- Kemper Government Securities
    
 
   
- Kemper International
    
 
   
- Kemper Small Cap Growth
    
 
   
- Kemper Investment Grade Bond
    
 
   
- Kemper Contrarian Value
    
 
   
- Kemper Small Cap Value
    
 
   
- Kemper Value+Growth
    
 
   
- Kemper Horizon 20+
    
 
   
- Kemper Horizon 10+
    
 
   
- Kemper Horizon 5
    
 
   
- Kemper Blue Chip
    
 
   
- Kemper Global Income
    
 
   
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccounts.
    
 
   
The MVA Option also provides fixed accumulations. The MVA Option is only
available during the Accumulation Period. An Owner may allocate amounts to one
or more Guarantee Periods. We may offer additional Guarantee Periods at Our
discretion. For new Contracts, We may limit the number of Guarantee Period
options available to 3. We credit interest daily to amounts allocated to the MVA
Option. We declare the rate at Our sole discretion. We guarantee amounts
allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee
Periods selected by the Owner. These guaranteed amounts are subject to any
applicable Withdrawal Charge, Market Value Adjustment or Records Maintenance
Charge. We will not change a Guaranteed Interest Rate for the duration of the
Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee
Periods are set at Our discretion. At the end of a Guarantee Period, a new
Guarantee Period for the same duration starts, unless the Owner timely elects
another Guarantee Period. The interests under the Contract relating to the MVA
Option are registered under the Securities Act of 1933 but are not registered
under the Investment Company Act of 1940. (See "The MVA Option," page 8.)
    
 
   
Transfers between Subaccounts are permitted before and after annuitization,
subject to limitations. A transfer from a Guarantee Period is subject to a
Market Value Adjustment unless effected within 15 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 16 and 24, respectively.)
    
 
   
An Owner may withdraw up to 15% of the Contract Value in any Contract Year
without a Withdrawal Charge. If the Owner withdraws more than 15% of the
Contract Value in any Contract Year, the amount in excess of 15% is subject to a
Withdrawal Charge.
    
 
                                                                               3
<PAGE>   8
 
   
The Withdrawal Charge is:
    
 
   
        - 6% in the first and second Contract Years
    
 
   
        - 5% in the third and fourth Contract Years
    
 
   
        - 4% in the fifth and sixth Contract Years
    
 
   
However, in no event shall the aggregate Withdrawal Charges assessed against a
Contract exceed 9% of the aggregate Purchase Payments made under the Contract.
Withdrawals will have tax consequences, including income tax and in some
circumstances an additional 10% penalty tax. Withdrawals are permitted from
Contracts issued with Section 403(b) Qualified Plans only under limited
circumstances. (See "Federal Income Taxes," page 26.)
    
 
   
A Market Value Adjustment also applies to any withdrawal (except during the
"free look" period), transfer, purchase of an annuity option and to death
benefit payments made more than 15 days before or 15 days after the end of a
Guarantee Period in the MVA Option. The Market Value Adjustment is applied to
the amount being withdrawn before deduction of any applicable Withdrawal
Charges. (See "The Contracts," page 12.)
    
 
   
Contract charges include:
    
 
   
        - mortality and expense risk
    
 
   
        - administrative expenses
    
 
   
        - records maintenance
    
 
   
        - applicable premium taxes
    
 
   
(See "Charges Against the Separate Account," page 19.) In addition, the
investment advisers to the Funds deduct varying charges against the assets of
the Funds for which they provide investment advisory services. (See the Funds'
prospectuses for such information.)
    
 
   
The Contract may be purchased as an Individual Retirement Annuity, Simplified
Employee Pension--IRA, Roth Individual Retirement Annuity, tax sheltered
annuity, defined compensation plan, and as a nonqualified annuity. (See
"Taxation of Annuities in General," page 26 and "Qualified Plans," page 29.)
    
 
   
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period will depend on the state in
which the Contract is issued. However, it will be at least ten days from the
date the Owner receives the Contract. (See "The Contracts," page 12.) In
addition, a special free look period applies in some circumstances to Contracts
issued as Individual Retirement Annuities, Simplified Employee Pensions--IRAs or
as Roth Individual Retirement Annuities.
    
 
                                        4
<PAGE>   9
 
                              SUMMARY OF EXPENSES
CERTIFICATE OWNER TRANSACTION EXPENSES
 
<TABLE>
<S>                                                       <C>                                                <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments).....................................  None
Contingent Deferred Sales Load (as a percentage of amount surrendered)*
                                                          Certificate Year of Withdrawal
                                                          First year.......................................    6%
                                                          Second year......................................    6%
                                                          Third year.......................................    5%
                                                          Fourth year......................................    5%
                                                          Fifth year.......................................    4%
                                                          Sixth year.......................................    4%
                                                          Seventh year and following.......................    0%
Surrender Fees (in addition to Withdrawal Charge)**........................................................  None
Exchange Fee...............................................................................................  None
ANNUAL CONTRACT FEE (Records Maintenance Charge)***........................................................   $30
</TABLE>
 
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily
account value)
<S>                             <C>
Mortality and Expense Risk....  1.10%
Administration................   .15%
Account Fees and Expenses.....     0%
Total Separate Account
  Annual Expenses.............  1.25%
</TABLE>
 
   
<TABLE>
<CAPTION>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets for the period ended December 31, 1998)             Kemper
                      KEMPER    KEMPER                           KEMPER                      KEMPER     INVESTMENT
                       MONEY    TOTAL      KEMPER     KEMPER   GOVERNMENT      KEMPER       SMALL CAP     GRADE
                      MARKET+   RETURN   HIGH YIELD   GROWTH   SECURITIES   INTERNATIONAL    GROWTH       BOND++
                      -------   ------   ----------   ------   ----------   -------------   ---------   ----------
<S>                   <C>       <C>      <C>          <C>      <C>          <C>             <C>         <C>
          Management
             Fees...    .50%     .55%       .60%       .60%       .55%           .75%          .65%        .60%
               Other
         Expenses...    .04      .05        .05        .05        .11            .18           .05         .07
                        ---      ---        ---        ---        ---            ---           ---         ---
               Total
           Portfolio
              Annual
         Expenses...    .54%     .60%       .65%       .65%       .66%           .93%          .70%        .67%
                        ===      ===        ===        ===        ===            ===           ===         ===
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                        KEMPER       KEMPER      KEMPER                                                  KEMPER      KEMPER
                      CONTRARIAN   SMALL CAP     VALUE+       KEMPER          KEMPER         KEMPER       BLUE       GLOBAL
                       VALUE++      VALUE++     GROWTH++   HORIZON 20+++   HORIZON 10+++   HORIZON 5++   CHIP#++   INCOME#+++
                      ----------   ---------    --------   -------------   -------------   -----------   -------   ----------
<S>                   <C>          <C>          <C>        <C>             <C>             <C>           <C>       <C>
          Management
              Fees..     .75%         .75%        .75%          .60%            .60%           .60%        .65%        .72%
               Other
         Expenses...     .03          .05         .03           .07             .04            .06         .11         .33
                         ---          ---         ---           ---             ---            ---         ---        ----
               Total
           Portfolio
              Annual
          Expenses..     .78%         .80%        .78%          .67%            .64%           .66%        .76%       1.05%
                         ===          ===         ===           ===             ===            ===         ===        ====
</TABLE>
    
 
                                    EXAMPLE
 
   
<TABLE>
<CAPTION>
                                                    SUBACCOUNT               1 YEAR    3 YEARS    5 YEARS    10 YEARS
                                                    ----------               ------    -------    -------    --------
<S>                                       <C>                                <C>       <C>        <C>        <C>
 
If you surrender your Contract at the
end of the applicable time period, you
would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets:
                                          Kemper Money Market #1+             $81       $112       $146        $215
                                          Kemper Total Return                  81        114        149         221
                                          Kemper High Yield                    82        116        151         227
                                          Kemper Growth                        82        116        151         227
                                          Kemper Government Securities         82        116        152         228
                                          Kemper International                 84        124        165         256
                                          Kemper Small Cap Growth              82        117        154         232
                                          Kemper Investment Grade Bond         82        116        152         229
                                          Kemper Contrarian Value              83        120        158         240
                                          Kemper Small Cap Value               83        120        159         243
                                          Kemper Value+Growth                  83        120        158         240
                                          Kemper Horizon 20+                   82        116        152         229
                                          Kemper Horizon 10+                   81        115        115         226
                                          Kemper Horizon 5                     82        116        152         228
                                          Kemper Blue Chip                     83        119        157         238
                                          Kemper Global Income                 85        127        171         269
 
If you do not surrender your Contract,
you would pay the following expenses on
a $1,000 investment, assuming 5% annual
return on assets:
                                          Kemper Money Market #1+             $19       $ 58       $ 99        $215
                                          Kemper Total Return                  19         60        102         221
                                          Kemper High Yield                    20         61        105         227
                                          Kemper Growth                        20         61        105         227
                                          Kemper Government Securities         20         61        105         228
                                          Kemper International                 23         70        119         256
                                          Kemper Small Cap Growth              20         63        108         232
                                          Kemper Investment Grade Bond         20         62        106         229
                                          Kemper Contrarian Value              21         65        112         240
                                          Kemper Small Cap Value               21         66        113         243
                                          Kemper Value+Growth                  21         65        112         240
                                          Kemper Horizon 20+                   20         62        106         229
                                          Kemper Horizon 10+                   20         61        104         226
                                          Kemper Horizon 5                     20         61        105         228
                                          Kemper Blue Chip                     21         64        111         238
                                          Kemper Global Income                 24         73        126         269
</TABLE>
    
 
                                        5
<PAGE>   10
 
The purpose of the preceding table is to assist Owners in understanding the
various costs and expenses that a Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund but not the MVA Option. See "Certificate Charges and Expenses" and "The MVA
Option" for more information regarding the various costs and expenses. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH MAY BE
ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN. The example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance of
any Subaccount. The Records Maintenance Charge is a single charge, it is not a
separate charge for each Subaccount. In addition, the effect of the Records
Maintenance Charge has been reflected by applying the percentage derived by
dividing the total amounts of annual Records Maintenance Charge collected by the
total net assets of all the Subaccounts in the Separate Account.
 
  * A Certificate Owner may withdraw up to 15% of the Separate Account Value
    plus Market Adjusted Value in any Certificate Year without assessment of any
    charge. Under certain circumstances the contingent deferred sales load may
    be reduced or waived, including when certain annuity options are selected.
 
 ** Surrenders and other withdrawals from the MVA Option are subject to a Market
    Value Adjustment unless made within 15 days before or 15 days after the end
    of a Guarantee Period. The Market Value Adjustment may increase or reduce
    the Guarantee Period Value.
 
*** Under certain circumstances the annual Records Maintenance Charge may be
    reduced or waived. The annual Records Maintenance Charge will be waived for
    Certificates with a Certificate Value exceeding $50,000 on the date of
    assessment.
 
   
  + Kemper Money Market Subaccount #2 is not shown because it is available only
    for dollar cost averaging that will deplete an Owner's Subaccount Value
    entirely at least by the end of the third Certificate Year.
    
 
   
 ++ Pursuant to their respective agreements with Kemper Variable Series, the
    investment manager and the accounting agent have agreed, for the one year
    period commencing on the date of this Prospectus, to limit their respective
    fees and to reimburse other operating expenses, in a manner communicated to
    the Board of the Fund, to the extent necessary to limit total operating
    expenses of the following described Portfolios to the amounts set forth
    after the Portfolio names: Kemper Value+Growth Portfolio (.84%), Kemper
    Contrarian Value Portfolio (.80%), Kemper Small Cap Value Portfolio (.84%),
    Kemper Horizon 5 Portfolio (.97%), Kemper Horizon 10+ Portfolio (.83%),
    Kemper Horizon 20+ Portfolio (.93%), Kemper Investment Grade Bond Portfolio
    (.80%), and Kemper Blue Chip Portfolio (.95%). The amounts set forth in the
    table above reflect actual expenses for the past fiscal year, which were
    lower than these expense limits.
    
 
   
+++ Pursuant to their respective agreements with Kemper Variable Series, the
    investment manager and the accounting agent have agreed, for the one year
    period commencing on the date of this Prospectus, to limit their respective
    fees and to reimburse other operating expenses, in a manner communicated to
    the Board of the Fund, to the extent necessary to limit total operating
    expenses of the Kemper Aggressive Growth, Kemper Technology Growth,
    Kemper-Dreman Financial Services, Kemper-Dreman High Return Equity, Kemper
    International Growth and Income, Kemper Global Blue Chip and Kemper Global
    Income. Portfolios of Kemper Variable Series to the levels set forth in the
    table above. Without taking into effect these expense caps, for the
    Aggressive Growth, Technology Growth, Financial Services, High Return
    Equity, International Growth and Income, Global Blue Chip and Global Income
    Portfolios of Kemper Variable Series; management fees are estimated to be
    .75%, .75%, .75%, .75%, 1.00%, 1.00% and .75%; Other Expenses are estimated
    to be .28%, .29%, .97%, .45%, 18.54%, 11.32%, and .33%, respectively; and
    total operating expenses are estimated to be 1.03%, 1.04%, 1.72%, 1.20%,
    19.54%, 12.32%, and 1.08%, respectively. In addition, for Kemper
    International Growth and Income and Kemper Global Blue Chip, the investment
    manager has agreed to limit its management fee to .70% and .85%,
    respectively, of such portfolios for one year from the date of this
    Prospectus.
    
 
                                        6
<PAGE>   11
 
--------------------------------------------------------------------------------
                        CONDENSED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
 The following condensed financial information is derived from the financial
 statements of the Separate Account. The data should be read in conjunction
 with the financial statements, related notes and other financial information
 included in the Statement of Additional Information.
 
 Selected data for accumulation units outstanding as of the year ended December
 31st for each period:
 
   
<TABLE>
<CAPTION>
                                                    1998     1997     1996     1995     1994     1993     1992
 ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD*    ----     ----     ----     ----     ----     ----     ----
<S>                                                <C>      <C>      <C>      <C>      <C>      <C>      <C>
Kemper Money Market Subaccount #1                   1.199    1.153    1.112    1.065    1.037    1.021    1.000
Kemper Money Market Subaccount #2                   1.292    1.227    1.168    1.105    1.063    1.034    1.000
Kemper Total Return Subaccount                      1.685    1.423    1.234     .991    1.109    1.002    1.000
Kemper High Yield Subaccount                        1.883    1.708    1.515    1.308    1.354    1.143    1.000
Kemper Growth Subaccount                            2.066    1.724    1.436    1.093    1.153    1.018    1.000
Kemper Government Securities Subaccount             1.359    1.263    1.247    1.061    1.104    1.050    1.000
Kemper International Subaccount                     1.698    1.571    1.365    1.225    1.287     .981    1.000
Kemper Small Cap Growth Subaccount**                2.220    1.675    1.324    1.031
Kemper Investment Grade Bond Subaccount***          1.106    1.027
Kemper Contrarian Value Subaccount***               1.499    1.164
Kemper Small Cap Value Subaccount***                1.215    1.010
Kemper Value+Growth Subaccount***                   1.408    1.137
Kemper Horizon 20+ Subaccount***                    1.361    1.144
Kemper Horizon 10+ Subaccount***                    1.274    1.105
Kemper Horizon 5 Subaccount***                      1.210    1.087
Kemper Blue Chip Subaccount****                     1.106
Kemper Global Income Subaccount****                 1.020
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                    1998     1997     1996     1995     1994     1993     1992
    ACCUMULATION UNIT VALUE AT END OF PERIOD        ----     ----     ----     ----     ----     ----     ----
<S>                                                <C>      <C>      <C>      <C>      <C>      <C>      <C>
Kemper Money Market Subaccount #1                   1.245    1.199    1.153    1.112    1.065    1.037    1.021
Kemper Money Market Subaccount #2                   1.358    1.292    1.227    1.168    1.105    1.063    1.034
Kemper Total Return Subaccount                      1.917    1.685    1.423    1.234     .991    1.109    1.002
Kemper High Yield Subaccount                        1.887    1.883    1.708    1.515    1.308    1.354    1.143
Kemper Growth Subaccount                            2.349    2.066    1.724    1.436    1.093    1.153    1.018
Kemper Government Securities Subaccount             1.437    1.359    1.263    1.247    1.061    1.104    1.050
Kemper International Subaccount                     1.845    1.698    1.571    1.365    1.225    1.287     .981
Kemper Small Cap Growth Subaccount**                2.595    2.220    1.675    1.324    1.031
Kemper Investment Grade Bond Subaccount***          1.179    1.106    1.027
Kemper Contrarian Value Subaccount***               1.765    1.499    1.164
Kemper Small Cap Value Subaccount***                1.065    1.215    1.010
Kemper Value+Growth Subaccount***                   1.672    1.408    1.137
Kemper Horizon 20+ Subaccount***                    1.520    1.361    1.144
Kemper Horizon 10+ Subaccount***                    1.401    1.274    1.105
Kemper Horizon 5 Subaccount***                      1.311    1.210    1.087
Kemper Blue Chip Subaccount****                     1.244    1.106
Kemper Global Income Subaccount****                 1.118    1.020
</TABLE>
    
 
   
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF   1998     1997     1996     1995     1994     1993     1992
PERIOD (000'S OMITTED)                               ----     ----     ----     ----     ----     ----     ----
<S>                                                 <C>      <C>      <C>      <C>      <C>      <C>      <C>
Kemper Money Market Subaccount #1                   28,318   20,687   12,271    8,710   14,423    5,757    3,037
Kemper Money Market Subaccount #2                    3,312    4,951    6,923    1,981    3,333    3,033    6,561
Kemper Total Return Subaccount                      61,104   72,701   73,747   65,648   68,207   51,444   27,355
Kemper High Yield Subaccount                        47,782   53,550   49,626   37,502   28,545   22,109    6,519
Kemper Growth Subaccount                            47,066   53,984   59,737   55,059   55,308   37,678   19,693
Kemper Government Securities Subaccount             18,658   19,445   21,355   21,288   24,760   28,414   16,647
Kemper International Subaccount                     25,265   28,090   27,660   20,930   21,035   12,503    4,699
Kemper Small Cap Growth Subaccount**                11,182   11,754   10,280    5,316    2,637
Kemper Investment Grade Bond Subaccount***           4,945    3,586    1,381
Kemper Contrarian Value Subaccount***               26,480   23,349   11,193
Kemper Small Cap Value Subaccount***                15,683   15,213    8,113
Kemper Value+Growth Subaccount***                   17,452   13,973    7,220
Kemper Horizon 20+ Subaccount***                     3,772    3,498    2,586
Kemper Horizon 10+ Subaccount***                     6,742    5,297    4,162
Kemper Horizon 5 Subaccount***                       3,386    2,899    1,818
Kemper Blue Chip Subaccount****                      6,025    1,879
Kemper Global Income Subaccount****                  1,206      319
</TABLE>
    
 
--------------------------------------------------------------------------------
   * Commencement of Offering on January 6, 1992.
  ** Commencement of Offering on May 2, 1994 at initial accumulation unit value
of 1.000.
 *** Commencement of Offering on May 1, 1996 at initial accumulation unit value
of 1.000.
**** Commencement of Offering on May 1, 1997 at initial accumulation unit value
of 1.000.
 
                                        7
<PAGE>   12
 
   
           KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND
    
 
KEMPER INVESTORS LIFE INSURANCE COMPANY
 
   
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a majority-owned (76.4 percent) subsidiary of Zurich
Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of
Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of
Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger
of the Zurich Group with the financial services business of B.A.T. Industries.
ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c., fifty-seven percent
and forty-three percent, respectively.
    
 
THE MVA OPTION
 
   
An Owner may allocate amounts in the Market Value Adjustment ("MVA") Option to
one or more Guarantee Periods with durations of one to ten years during the
Accumulation Period. At Our discretion, We may offer additional Guarantee
Periods or limit, for new Contracts, the number of Guarantee Periods available
to three.
    
 
   
The amounts allocated to the MVA Option under the Contracts are invested under
the laws regulating Our General Account. Assets supporting the amounts allocated
to Guarantee Periods are held in a "non-unitized" separate account. However, Our
General Account assets are available to fund benefits under the Contracts. A
non-unitized separate account is a separate account in which the Owner does not
participate in the performance of the assets through unit values. There are no
discrete units for this separate account. The assets of the non-unitized
separate account are held as reserves for Our guaranteed obligations. The assets
of the separate account are not chargeable with liabilities arising out of the
business conducted by any other separate account or out of any other business We
may conduct.
    
 
   
State insurance laws concerning the nature and quality of investments regulate
Our General Account investments and any non-unitized separate account
investments. These laws generally permit investment in federal, state and
municipal obligations, preferred and common stocks, corporate bonds, real estate
mortgages, real estate and certain other investments. (See "Management's
Discussion and Analysis--INVESTMENTS" and "FINANCIAL STATEMENTS" for information
on KILICO's investments.) Our affiliate, Scudder Kemper Investments, Inc.
("SKI"), manages Our General Account.
    
 
   
We consider the return available on the instruments in which Contract proceeds
are invested when establishing Guaranteed Interest Rates. This return is only
one of many factors considered in establishing Guaranteed Interest Rates. (See
"The Accumulation Period-- Establishment of Guaranteed Interest Rates.")
    
 
   
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
    
 
   
     - securities issued by the United States Government or its agencies or
       instrumentalities, which issues may or may not be guaranteed by the
       United States Government;
    
 
   
     - debt securities which have an investment grade, at the time of purchase,
       within the four (4) highest grades assigned by Moody's Investors
       Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
       Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
       nationally recognized rating service;
    
 
                                        8
<PAGE>   13
 
   
     - other debt instruments including issues of or guaranteed by banks or bank
       holding companies and corporations, which obligations, although not rated
       by Moody's or Standard & Poor's, are deemed by Our management to have an
       investment quality comparable to securities which may be otherwise
       purchased; and
    
 
   
     - options and futures transactions on fixed income securities.
    
 
   
Our invested assets portfolio at December 31, 1998 included approximately 82.7
percent in U.S. Treasuries, investment grade corporate, foreign and municipal
bonds, and commercial paper, 2.3 percent in below investment grade (high risk)
bonds, 3.9 percent in mortgage loans and other real estate-related investments
and 11.1 percent in all other investments. (See "Management's Discussion and
Analysis--INVESTMENTS.")
    
 
   
We are not obligated to invest the amounts allocated to the MVA Option according
to any particular strategy, except as state insurance laws may require. (See
"Management's Discussion and Analysis--INVESTMENTS.")
    
 
THE SEPARATE ACCOUNT
 
   
We established the KILICO Variable Annuity Separate Account on May 29, 1981
pursuant to Illinois law as the KILICO Money Market Separate Account. KILICO
Money Market Separate Account was initially registered with the Securities and
Exchange Commission ("SEC") as an open-end, diversified management investment
company. On November 2, 1989, contract owners approved a Reorganization under
which the Separate Account was restructured as a unit investment trust. The SEC
does not supervise the management, investment practices or policies of the
Separate Account or KILICO.
    
 
   
Benefits provided under the Contracts are Our obligations. Although the assets
in the Separate Account are Our property, they are held separately from Our
other assets and are not chargeable with liabilities arising out of any other
business We may conduct. Income, capital gains and capital losses, whether or
not realized, from the assets allocated to the Separate Account are credited to
or charged against the Separate Account without regard to the income, capital
gains and capital losses arising out of any other business We may conduct.
    
 
   
Sixteen Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future.
    
 
   
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as
requested by Owners. All dividends and capital gains distributions received by
the Separate Account from a Portfolio are reinvested in that Portfolio at net
asset value and retained as assets of the corresponding Subaccount.
    
 
   
The Separate Account's financial statements appear in the Statement of
Additional Information.
    
 
THE FUND
 
   
The Separate Account invests in shares of the Kemper Variable Series (formerly
Investors Fund Series).
    
 
   
The Fund provides investment vehicles for variable life insurance and variable
annuity contracts. Shares of the Fund are sold only to insurance company
separate accounts and qualified retirement plans. Shares of the Fund may be sold
to separate accounts of other insurance companies, whether or not affiliated
with Us. It is conceivable that in the future it may be disadvantageous for
variable life insurance separate accounts and
    
 
                                                                               9
<PAGE>   14
 
   
variable annuity separate accounts of companies unaffiliated with Us, or for
variable life insurance separate accounts, variable annuity separate accounts
and qualified retirement plans to invest simultaneously in the Fund. Currently,
We do not foresee disadvantages to variable life insurance owners, variable
annuity owners or qualified retirement plans. The Fund monitors events for
material conflicts between owners and determine what action, if any, should be
taken. In addition, if We believe that the Fund's response to any of those
events or conflicts insufficiently protects Owners, We will take appropriate
action.
    
 
   
The Fund consists of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
    
 
   
The sixteen Portfolios of the Fund are summarized below:
    
 
   
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments. The Portfolio seeks to maintain a net asset value of $1.00
per share but there is no assurance that the Portfolio will be able to do so.
    
 
   
KEMPER TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, consistent with reasonable risk.
    
 
   
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
    
 
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
 
   
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
    
 
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
 
   
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
    
 
   
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.
    
 
   
KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total return.
    
 
   
KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation.
    
 
   
KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital. A secondary objective of
the Portfolio is the reduction of risk over a full market cycle compared to a
portfolio of only growth stocks or only value stocks.
    
 
KEMPER HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
 
   
KEMPER HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
    
 
   
KEMPER HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
    
 
KEMPER BLUE CHIP PORTFOLIO seeks growth of capital and of income.
 
KEMPER GLOBAL INCOME PORTFOLIO seeks to provide high current income consistent
with prudent total return asset management.
 
                                       10
<PAGE>   15
 
   
The Portfolios of the Fund may not achieve their stated objective. More detailed
information, including a description of risks involved in investing in the
Portfolios, is found in the Fund's prospectus accompanying this Prospectus, and
Statement of Additional Information available from Us upon request.
    
 
   
Responsibility for overall management of the Fund rests with the Board of
Trustees and officers of the Fund. Scudder Kemper Investments, Inc. ("SKI"), Our
affiliate, is the investment manager for each of the Portfolios. Scudder
Investments (U.K.) Limited ("Scudder U.K."), an affiliate of SKI, is the
sub-adviser for the Kemper International and Kemper Global Income Portfolios.
    
 
CHANGE OF INVESTMENTS
 
   
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We reserve the right to eliminate the shares of any of the Portfolios
and to substitute shares of another Portfolio or of another investment company,
if the shares of a Portfolio are no longer available for investment, or if in
our judgment further investment in any Portfolio becomes inappropriate in view
of the purposes of the Separate Account. We will not substitute any shares
attributable to an Owner's interest in a Subaccount without prior notice and the
SEC's prior approval, if required. The Separate Account may purchase other
securities for other series or classes of policies, or may permit a conversion
between series or classes of policies on the basis of requests made by Owners.
    
 
   
We may 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. New subaccounts may be established when, in Our discretion, marketing
needs or investment conditions warrant. New subaccounts may be made available to
existing Owners as We determine. We may also eliminate or combine one or more
subaccounts, transfer assets, or substitute one subaccount for another
subaccount, if, in Our discretion, marketing, tax, or investment conditions
warrant. We will notify all Owners of any such changes.
    
 
   
If We deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be: (a) operated as a management company
under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with our other separate
accounts. To the extent permitted by law, We may transfer the assets of the
Separate Account to another separate account or to the General Account.
    
 
PERFORMANCE INFORMATION
 
   
The Separate Account may advertise several types of performance information for
the Subaccounts. All Subaccounts may advertise standardized "average annual
total return" and nonstandardized "total return." The Kemper High Yield
Subaccount, Kemper Government Securities Subaccount and Kemper Investment Grade
Bond Subaccount may also advertise "yield". The Kemper Money Market Subaccount
may advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of Subaccount's future
performance.
    
 
   
Standardized average annual total return and nonstandardized total return
calculations measure a Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments. Standardized average annual total return and nonstandardized total
return will be quoted for periods of at least one year, three years, five years
and ten years, if applicable. In addition, We will show standardized average
annual total return for the life of the Subaccount, meaning the
    
 
                                       11
<PAGE>   16
 
   
time the underlying Portfolio has been held in the Subaccount. We will show
nonstandardized total return for the life of the Portfolio, meaning the time the
underlying Portfolio has been in existence. Standardized average annual total
return will be current to the most recent calendar quarter. Nonstandardized
total return will be current to most recent calendar month. Standardized average
annual total return figures are annualized and, therefore, represent the average
annual percentage change in the value of a Subaccount investment over the
applicable period. Nonstandardized total return may include annualized and
nonannualized (cumulative) figures. Nonannualized figures represent the actual
percentage change over the applicable period.
    
 
   
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the Kemper Money
Market Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period, compounded on a semi-annual basis. The effective yield for the
Kemper Money Market Subaccount is calculated similarly, but includes the effect
of assumed compounding calculated under rules prescribed by the SEC. The Kemper
Money Market Subaccount's effective yield will be slightly higher than its yield
due to this compounding effect.
    
 
   
The Subaccounts' units are sold at Accumulation Unit Value. The Subaccounts'
performance figures and Accumulation Unit values fluctuate. Subaccount units are
redeemable by an Owner at Accumulation Unit value, which may be more or less
than original cost. The performance figures reflect the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years may be subject to a Withdrawal
Charge that ranges from 6% the first year to 0% after seven years. Yield,
effective yield and nonstandardized total return figures do not include the
effect of any Withdrawal Charge that may be imposed upon the redemption of
units, and thus may be higher than if such charges were deducted. Standardized
average annual total return figures include the effect of the applicable
Withdrawal Charge that may be imposed at the end of the period.
    
 
   
The Subaccounts may be compared to relevant indices and performance data from
independent sources. From time to time, the Separate Account may quote
information from publications such as MORNINGSTAR, INC., THE WALL STREET
JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA
TODAY, INSTITUTIONAL INVESTOR, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE,
BROKER WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
    
 
   
Additional information concerning a Subaccount's performance and these indices
and independent sources is provided in the Statement of Additional Information.
    
 
   
                                 THE CONTRACTS
    
 
   
A. GENERAL INFORMATION.
    
 
   
The minimum initial Purchase Payment is $2,000, and the minimum subsequent
payment is $500. Cumulative Purchase Payments in excess of $1,000,000 require
Our prior approval.
    
 
   
We may, at any time, amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
    
 
   
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period depends upon the state in which
the Contract is issued. However, it will be at least 10 days from the date the
Owner receives the Contract. The amount of the refund depends on the state in
    
 
12
<PAGE>   17
 
   
which the Contract is issued. Generally, it will be an amount at least equal to
the Separate Account Contract Value plus amounts allocated to the General
Account and the Guarantee Periods on the date We receive the returned Contract,
without any deduction for Withdrawal Charges or Records Maintenance Charges.
Some states require the return of the Purchase Payment. In addition, a special
free look period applies in some circumstances to Contracts issued as Individual
Retirement Annuities, Simplified Employee Pensions--IRAs or as Roth Individual
Retirement Annuities.
    
 
   
During the Accumulation Period, the Owner may assign the Contract or change a
Beneficiary at any time by signing Our form. No assignment or Beneficiary change
is binding on Us until We receive it. We assume no responsibility for the
validity of the assignment or Beneficiary change. An assignment will subject the
Owner to immediate tax liability and may subject the Owner to a 10% tax penalty.
(See "Tax Treatment of Withdrawals, Loans and Assignments.")
    
 
   
Amounts payable during the Annuity Period may not be assigned or encumbered. In
addition, to the extent permitted by law, annuity payments are not subject to
levy, attachment or other judicial process for the payment of the payee's debts
or obligations.
    
 
   
The Owner designates the Beneficiary. If the Annuitant or Owner dies, and no
designated Beneficiary or contingent beneficiary is alive at that time, We will
pay the Annuitant's or Owner's estate.
    
 
   
Under a Qualified Contract, the provisions of the applicable plan may prohibit a
change of Beneficiary. Generally, an interest in a Qualified Contract may not be
assigned.
    
 
                            THE ACCUMULATION PERIOD
 
A. APPLICATION OF PURCHASE PAYMENTS.
 
   
The Owner selects the allocation of Purchase Payments to the Subaccount(s),
Guarantee Periods, or Fixed Account. The amount of each Purchase Payment
allocated to a Subaccount is based on the value of an Accumulation Unit, as
computed after We receive the Purchase Payment. Generally, We determine the
value of an Accumulation Unit by 3:00 p.m. Central time on each day that the New
York Stock Exchange is open for trading. Purchase Payments allocated to a
Guarantee Period or to the Fixed Account begin earning interest one day after We
receive them. However, with respect to initial Purchase Payments, the amount is
credited only after We determine to issue the Contract, but no later than the
second day after We receive the Purchase Payment. After the initial purchase, We
determine the number of Accumulation Units credited by dividing the Purchase
Payment allocated to a Subaccount by the Subaccount's Accumulation Unit value,
as computed after We receive the Purchase Payment.
    
 
   
The number of Accumulation Units will not change due to investment experience.
Accumulation Unit value varies to reflect the investment experience of the
Subaccount and the assessment of charges against the Subaccount, other than the
Records Maintenance Charge. The number of Accumulation Units and Guarantee
Period Value is reduced when the Records Maintenance Charge is assessed.
    
 
   
If We are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, We will promptly request the
necessary information. If the requested information is not furnished within 5
business days after We receive the initial Purchase Payment, or if We determine
that We cannot issue the Contract within the five 5 day period, We will return
the initial Purchase Payment to the Owner, unless the Owner consents to Our
retaining the Purchase Payment until the application is completed.
    
 
                                                                              13
<PAGE>   18
 
B. ACCUMULATION UNIT VALUE.
 
   
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units purchased is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. When amounts are transferred out of or deducted from a Subaccount, units
are redeemed in a similar manner.
    
 
   
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
Period.
    
 
   
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
    
 
   
The investment experience factor of a Subaccount for any Valuation Period is
determined by the following formula:
    
 
   
     (1 / 2) - 3, where:
    
 
   
     (1) is the net result of:
    
   
         - the net asset value per share of the investment held in the
           Subaccount determined at the end of the current Valuation Period;
           plus
    
 
   
         - the per share amount of any dividend or capital gain distributions
           made by the investments held in the Subaccount, if the "ex-dividend"
           date occurs during the current Valuation Period; plus or minus
    
 
   
         - a charge or credit for any taxes reserved for the current Valuation
           Period which We determine have resulted from the investment
           operations of the Subaccount;
    
 
   
     (2) is the net asset value per share of the investment held in the
     Subaccount determined at the end of the preceeding Valuation Period;
    
 
   
     (3) is the factor representing the mortality and expense risk and
     administration charges.
    
 
   
C. GUARANTEE PERIODS OF THE MVA OPTION.
    
 
   
An Owner may allocate Purchase Payments to one or more Guarantee Periods with
durations of one to ten years. Each Guarantee Period has a Guaranteed Interest
Rate which will not change during the Guarantee Period. Interest is credited
daily at the effective annual rate.
    
 
   
The following example illustrates how We credit Guarantee Period interest.
    
 
   
                EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
    
 
   
<TABLE>
<S>                                           <C>
Purchase Payment:                             $40,000
Guarantee Period:                             5 Years
Guaranteed Interest Rate:                     4.0% Effective Annual Rate
</TABLE>
    
 
14
<PAGE>   19
 
   
<TABLE>
<CAPTION>
                                                 INTEREST CREDITED       CUMULATIVE
                    YEAR                            DURING YEAR       INTEREST CREDITED
                    ----                         -----------------    -----------------
<S>                                              <C>                  <C>
1 ...........................................        $1,600.00            $1,600.00
2 ...........................................         1,664.00             3,264.00
3 ...........................................         1,730.56             4,994.56
4 ...........................................         1,799.78             6,794.34
5 ...........................................         1,871.77             8,666.11
</TABLE>
    
 
   
Accumulated Value at the end of 5 years is:
    
 
   
                        $40,000 + $8,666.11 = $48,666.11
    
 
   
NOTE: THIS EXAMPLE ASSUMES THAT NO WITHDRAWALS ARE MADE DURING THE FIVE-YEAR
PERIOD. IF THE OWNER MAKES WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET
VALUE ADJUSTMENTS AND WITHDRAWAL CHARGES APPLY.
    
 
   
THE HYPOTHETICAL INTEREST RATE IS NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES. ACTUAL GUARANTEED INTEREST RATES FOR ANY GUARANTEE PERIOD MAY BE
MORE OR LESS THAN THOSE SHOWN.
    
 
   
At the end of any Guarantee Period, We send written notice of the beginning of a
new Guarantee Period. A new Guarantee Period for the same duration starts unless
the Owner elects another Guarantee Period within thirty days after the end of
the terminating Guarantee Period. The Owner may choose a different Guarantee
Period by preauthorized telephone instructions or by giving Us written notice.
An Owner should not select a new Guarantee Period extending beyond the Annuity
Date. Otherwise, the Guarantee Period amount available for annuitization is
subject to Market Value Adjustments and may be subject to Withdrawal Charges.
(See "Market Value Adjustment" and "Withdrawal Charge" below.)
    
 
   
The amount reinvested at the beginning of a new Guarantee Period is the
Guarantee Period Value for the Guarantee Period just ended. The Guaranteed
Interest Rate in effect when the new Guarantee Period begins applies for the
duration of the new Guarantee Period.
    
 
   
An Owner may call Us at 1-800-621-5001 or write to Kemper Investors Life
Insurance Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049
for the new Guaranteed Interest Rates.
    
 
   
D. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
    
 
   
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
established, rates are guaranteed for the respective Guarantee Periods. We
advise an Owner of the Guaranteed Interest Rate for a chosen Guarantee Period
when We receive a Purchase Payment, when a transfer is effectuated or when a
Guarantee Period renews. Withdrawals of Accumulated Guarantee Period Value are
subject to Withdrawal Charges and Records Maintenance Charges and may be subject
to a Market Value Adjustment. (See "Market Value Adjustment" below.)
    
 
   
We have no specific formula for establishing the Guaranteed Interest Rates. The
determination may be influenced by, but not necessarily correspond to, the
current interest rate environment. (See "The MVA Option".) We may also consider,
among other factors, the duration of a Guarantee Period, regulatory and tax
requirements, sales commissions and administrative expenses We bear, and general
economic trends.
    
 
   
WE MAKE THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED.
    
 
   
WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
    
 
                                       15
<PAGE>   20
   
E. CONTRACT VALUE.
    
 
   
On any Valuation Date, Contract Value equals the total of:
    
 
   
     - the number of Accumulation Units credited to each Subaccount times
    
 
   
     - the value of a corresponding Accumulation Unit for each Subaccount plus
    
 
   
     - Accumulated Guarantee Period Value
    
 
F. TRANSFER DURING ACCUMULATION PERIOD.
 
   
During the Accumulation Period, an Owner may transfer the Contract Value among
the Subaccounts and the Guarantee Periods, subject to the following provisions:
    
 
   
     - the Contract Value transferred must be at least $1,000, unless the entire
       Subaccount or Guarantee Period Value is transferred;
    
 
   
     - the Owner is limited to allocating Contract Value to a maximum of 16
       allocation options (all Guarantee Periods are considered one allocation
       option) including 40 Guarantee Periods under the MVA Option;
    
 
   
     - only one transfer is allowed every 15 days; and
    
 
   
     - the Contract Value remaining in a Subaccount or Guarantee Period must be
       at least $1,000, unless the total value is transferred.
    
 
   
In addition, transfers of Guarantee Period Value are subject to Market Value
Adjustment unless the transfer is made within 15 days of the end of the
Guarantee Period. Because a transfer before the end of a Guarantee Period is
subject to a Market Value Adjustment, the amount transferred from the Guarantee
Period may be more or less than the requested dollar amount.
    
 
   
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after We receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if We follow good faith instructions given in accordance
with Our procedures, including requests for personal identifying information,
that are designed to limit unauthorized use of the privilege. Therefore, an
Owner bears the risk of loss in the event of a fraudulent telephone transfer.
    
 
   
G. WITHDRAWAL DURING ACCUMULATION PERIOD.
    
 
   
The Owner may redeem some or all of the Contract Value minus previous
withdrawals, plus or minus any applicable Market Value Adjustment and minus any
Withdrawal Charge. Withdrawals will have tax consequences. (See "Federal Tax
Matters.") A withdrawal of the entire Contract Value is called a surrender.
    
 
   
Partial withdrawals and surrenders are subject to the following:
    
 
   
In any Contract Year, an Owner may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
    
 
   
     - the excess of Contract Value over total Purchase Payments subject to
       Withdrawal Charges, minus prior withdrawals that were previously assessed
       a Withdrawal Charge, and
    
 
   
     - 15% of the Contract Value.
    
 
16
<PAGE>   21
 
   
See "Contract Charges and Expenses--Withdrawal Charge" for a discussion of
charges applicable to partial withdrawals and surrenders.
    
 
   
If Contract Value is allocated to more than one investment option, an Owner must
specify the source of the partial withdrawal. If an Owner does not specify the
source, We redeem Accumulation Units on a pro rata basis from all investment
options in which the Owner has an interest. Accumulation Units attributable to
the earliest Contribution Years are redeemed first.
    
 
   
Partial withdrawals are subject to the following:
    
 
   
     - A Purchase Payment must be made 30 days before a partial withdrawal of
       such Purchase Payment is made.
    
 
   
     - The minimum withdrawal is $1,000 (before any Market Value Adjustment), or
       the Owner's entire interest in the investment option(s) from which
       withdrawal is requested.
    
 
   
     - The Owner must leave at least $1,000 in each investment option from which
       the withdrawal is requested, unless the total value is withdrawn and the
       minimum Contract Value must be at least $2,500.
    
 
   
Election to withdraw shall be made in writing to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049 and should
be accompanied by the Contract if surrender is requested. Withdrawal requests
are processed only on days when the New York Stock Exchange is open. The
Withdrawal Value attributable to the Subaccounts is determined on the basis on
the Accumulation Unit values, as calculated after we receive the request. The
Withdrawal Value attributable to the Subaccounts is paid within 7 days after We
receive the request. However, We may suspend withdrawals or delay payment:
    
 
   
     - during any period when the New York Stock Exchange is closed
    
 
   
     - when trading in a Portfolio is restricted or the SEC determines that an
       emergency exists
    
 
   
     - as the SEC by order may permit.
    
 
   
For withdrawal requests from the MVA Option, We may defer any payment for up to
six months, as permitted by state law. During the deferral period, We will
continue to credit interest at the current Guaranteed Interest Rate for the same
Guarantee Period.
    
 
H. MARKET VALUE ADJUSTMENT.
 
   
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected during the "free look" period or within 15 days after a Guarantee
Period ends, may be adjusted up or down by a Market Value Adjustment. The Market
Value Adjustment applies before deduction of a Withdrawal Charge. The Market
Value Adjustment also applies to death benefits payable upon the death of the
Owner or Annuitant.
    
 
   
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, the Market Value Adjustment
reduces Market Adjusted Value and results in a lower payment. Thus, if interest
rates increase, the withdrawal could be less than the original Purchase Payment
or the original amount allocated to a Guarantee Period. Conversely, if the
Guaranteed Interest Rate is higher than the applicable Current Interest Rate,
the Market Value Adjustment increases Market Adjusted Value and results in a
higher payment.
    
 
                                       17
<PAGE>   22
 
   
The Market Value Adjustment (MVA) uses this formula:
    
 
<TABLE>
  <S>  <C>  <C>  <C>  <C>  <C>  <C>      <C>  <C>     <C>  <C>
                                (1 + I)
  MVA    =  MPV    X    [    [  -------    ]  (t/365)  -1    ]
                                (1 + J)
</TABLE>
 
   
     Where I is the Guaranteed Interest Rate being credited to the Guarantee
     Period Value (MPV) subject to the Market Value Adjustment,
    
 
   
     J is the Current Interest Rate We declare, as of the effective date of the
     application of the Market Value Adjustment, for current allocations to a
     Guarantee Period the length of which is equal to the balance of the
     Guarantee Period for the Guarantee Period Value subject to the Market Value
     Adjustment, rounded to the next higher number of complete years, and
    
 
   
     t is the number of days remaining in the Guarantee Period.
    
 
   
The .005 Market Value Adjustment factor can be changed in the future, at Our
discretion on newly issued Contracts.
    
 
For an illustration showing an upward and a downward adjustment, see Appendix A.
 
I. DEATH BENEFIT.
 
   
We pay a death benefit to the Beneficiary if any of the following occurs during
the Accumulation Period:
    
 
   
     - the Owner, who is also the Annuitant, dies
    
 
   
     - the Annuitant or the Owner dies when the Annuitant is not the Owner
    
 
   
     - a joint owner dies
    
 
   
     - the surviving joint Annuitant, when joint Annuitants are named and are
       not the Owners, dies.
    
 
   
For Non-Qualified Contracts, if the Beneficiary is the Owner's surviving spouse,
the surviving spouse may elect to be treated as the successor Owner of the
Contract with no requirements to begin Death Benefit distribution.
    
 
   
If a death benefit becomes payable because of the death of an Owner, it must be
fully paid out within 5 years of the Owner's death, unless it is payable to the
named beneficiary over the beneficiary's life expectancy, beginning no more than
1 year after the Owner's death. The death benefit proceeds applied to the
annuity must be $4,000 or more.
    
 
   
If the death benefit becomes payable because of the death of the Annuitant or
joint Annuitant, it will be paid as selected by the named beneficiary, including
a lump sum withdrawal or Annuity Option, provided, in the case of an annuity
option, that the death benefit proceeds are $4,000 or more.
    
 
   
The death benefit payable under the Contract depends upon issue age of the Owner
except in the case of a Contract issued where the Owner differs from the
Annuitant, the death benefit issue age will be based on the age of the Owner or
Annuitant, whichever is older.
    
 
   
For a Contract issued to an Owner prior to age 66, the death benefit payable
during the first six Contract Years will be Market Adjusted Value plus Separate
Account Value as of the date We receive proof of death and return of the
Contract, or the sum of all Purchase Payments (minus withdrawals and withdrawal
charges) accumulated at 5% annually per Contract Year, whichever is greater. The
death benefit payable at the end of the sixth Contract Year is the greater of
Market Adjusted Value plus Separate Account Value as
    
18
<PAGE>   23
   
of the date We receive proof of death and return of the Contract, or the sum of
all Purchase Payments (minus withdrawals and withdrawal charges) accumulated at
5% annually per Contract Year ("Minimum Death Benefit Value"). From the seventh
Contract Year to the twelfth Contract Year, the death benefit payable during the
Accumulation Period is the Market Adjusted Value plus Separate Account Value as
of the date We receive proof of death and return of the Contract, or Minimum
Death Benefit Value at the end of year six plus subsequent Purchase Payments
minus withdrawals and withdrawal charges, whichever is greater. Every six years
after the end of the twelfth Contract Year the Minimum Death Benefit Value plus
later Purchase Payments minus withdrawals and withdrawal charges is compared to
Market Adjusted Value plus Separate Account Value and whichever is greater
determines the new Current Minimum Death Benefit Value for the next six Contract
Years.
    
 
   
For a Contract issued to an Owner age 66 and over, the death benefit payable
during the Accumulation Period for the first six Contract Years is Market
Adjusted Value plus Separate Account Value, or the sum of all Purchase Payments
(minus withdrawals and withdrawal charges), whichever is greater. At the end of
the sixth Contract Year, the Minimum Death Benefit Payable will be set for the
remainder of the Accumulation Period at the greater of Market Adjusted Value
plus Separate Account Value, or the sum of all Purchase Payments (minus
withdrawals and withdrawal charges). For the remainder of the Accumulation
Period, the beneficiary will receive the greater of Market Adjusted Value plus
Separate Account Value or the Minimum Death Benefit Value plus subsequent
Purchase Payments minus withdrawals and withdrawal charges.
    
 
   
The death benefit is payable upon the receipt by Us at Our Home Office of proof
of death and return of the Contract, election of the method of payment, and
sufficient information about the beneficiary to make payment. The beneficiary
may receive a lump sum benefit, defer receipt of the benefit for up to 5 years
or select an available Annuity Option if the proceeds are $4,000 or more.
    
 
   
                         CONTRACT CHARGES AND EXPENSES
    
 
   
We deduct the following charges and expenses:
    
 
   
     - mortality and expense risk
    
 
   
     - administrative expenses
    
 
   
     - Records Maintenance Charge
    
 
   
     - Withdrawal Charge
    
 
   
     - applicable premium taxes
    
 
   
Subject to certain expense limitations, investment management fees and other
Fund expenses are indirectly borne by the Owner.
    
 
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
 
   
1. MORTALITY AND EXPENSE RISK CHARGE.
    
 
   
We assess each Subaccount a daily asset charge for mortality and expense risks
at a rate of 1.25% per annum. Variable Annuity payments reflect the investment
experience of each Subaccount but are not affected by changes in actual
mortality experience or by actual expenses incurred by Us.
    
 
   
The mortality risk We assume arises from two contractual obligations. First, if
the Owner or Annuitant dies before the Annuity Date, We may, in some cases, pay
more than Contract Value. (See "Death Benefit", page 18) Second, when Annuity
Options involving life contingencies are selected, We assume the risk that
Annuitants will live beyond actuarial life expectancies.
    
                                                                              19
                                                                                
<PAGE>   24
 
   
We also assume an expense risk. Actual expenses of administering the Contracts
may exceed the amounts We recover from the Records Maintenance Charge or the
administrative cost portion of the daily asset charge.
    
 
   
2. ADMINISTRATIVE COSTS.
    
 
   
We assess each Subaccount a daily asset charge for administrative costs at a
rate of .15% per annum. This charge reimburses Us for expenses incurred for
administering the Contracts. These expenses include Owner inquiries, changes in
allocations, Owner reports, Contract maintenance costs, and data processing
costs. The administrative charge covers the average anticipated administrative
expenses incurred while the Contracts are in force. There is not necessarily a
direct relationship between the amount of the charge and the administrative
costs of the particular Contract.
    
 
   
B. RECORDS MAINTENANCE CHARGE.
    
 
   
We deduct an annual Records Maintenance Charge of $30 during the Accumulation
Period. The charge is assessed:
    
 
   
     - at the end of each Contract Year,
    
 
   
     - on Contract surrender and
    
 
   
     - upon annuitization.
    
 
   
However, We do not deduct the Records Maintenance Charge for Contracts with
Contract Value of at least $50,000 on the assessment date.
    
 
   
This charge reimburses Us for the expenses of establishing and maintaining
Contract records. The Records Maintenance Charge reduces the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
    
 
   
The Records Maintenance Charge is assessed equally among all investment options
in which the Owner has an interest.
    
 
   
C. WITHDRAWAL CHARGE.
    
 
   
We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal
Charge covers Contract sales expenses, including commissions and other promotion
and acquisition expenses.
    
 
   
Each Contract Year, an Owner may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
    
 
   
     - the excess of Contract Value over total Purchase Payments subject to
      Withdrawal Charges, minus prior withdrawals that were previously assessed
      a Withdrawal Charge, and
    
 
   
     - 15% of the Contract Value.
    
 
20
<PAGE>   25
 
   
If the Owner withdraws a larger amount, the excess Purchase Payments withdrawn
are subject to a Withdrawal Charge. The Withdrawal Charge applies in the first
six Contribution Years following each Purchase Payment as follows:
    
 
   
<TABLE>
<CAPTION>
                      CONTRIBUTION                           WITHDRAWAL
                          YEAR                                CHARGES
                      ------------                           ----------
<S>                                                          <C>
First....................................................        6%
Second...................................................        6%
Third....................................................        5%
Fourth...................................................        5%
Fifth....................................................        4%
Sixth....................................................        4%
Seventh and following....................................        0%
</TABLE>
    
 
   
Purchase Payments are deemed surrendered in the order in which they were
received.
    
 
   
When a withdrawal is requested, the Owner receives a check in the amount
requested. If a Withdrawal Charge applies, Contract Value is reduced by the
Withdrawal Charge, plus the dollar amount sent to the Owner.
    
 
   
Because Contribution Years are based on the date each Purchase Payment is made,
Owners may be subject to a Withdrawal Charge, even though the Contract may have
been issued many years earlier. (For additional details, see "Withdrawal During
Accumulation Period.")
    
 
   
Subject to certain exceptions and state approvals, withdrawal charges are not
assessed on withdrawals:
    
 
   
     - after an Owner has been confined in a hospital or skilled health care
       facility for at least thirty days and the Owner remains confined at the
       time of the request;
    
 
   
     - within thirty days following an Owner's discharge from a hospital or
       skilled health care facility after a confinement of at least thirty days.
    
 
   
Restrictions and provisions related to the nursing care or hospitalization
disability waivers are described in Contract endorsements.
    
 
   
The Withdrawal Charge compensates Us for Contract distribution expense.
Currently, We anticipate Withdrawal Charges will not fully cover distribution
expenses. Unrecovered distribution expenses may be recovered from Our general
assets. Those assets may include proceeds from the mortality and expense risk
charge.
    
 
   
The Withdrawal Charge also applies at annuitization to accounts attributable to
Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if the Owner selects Annuity Options 2, 3 or 4
or if payments under Annuity Option 1 are scheduled to continue for at least
five years. See "The Annuity Period--Annuity Options" for a discussion of the
Annuity Options available.
    
 
   
We may reduce or eliminate the Withdrawal Charge if We anticipate that We will
incur lower sales expenses or perform fewer services because of economies due to
the size of a group, the average contribution per participant, or the use of
mass enrollment procedures. No Withdrawal Charge applies to Contracts sold to
officers, directors and employees of KILICO and Kemper Variable Series (formerly
Investors Fund Series) ("KVS"), KVS investment advisers and principal
underwriter or certain affiliated companies, or to any trust, pension,
profit-sharing or other benefit plan for such persons.
    
 
                                       21
<PAGE>   26
 
   
D. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
    
 
   
Each Portfolio's net asset value reflects the deduction of investment management
fees and general operating expenses. Subject to limitations, Owners indirectly
bear these fees and expenses. Investment management fees appear on page 5.
Further detail is provided in the attached prospectuses for the Portfolios and
the Funds' Statements of Additional Information.
    
 
   
E. STATE PREMIUM TAXES.
    
 
   
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If We pay state premium taxes, We may charge the amount
paid against Contract Value upon annuitization. See "Appendix B--State Premium
Tax Chart" in the Statement of Additional Information.
    
 
   
F. EXCEPTIONS.
    
 
   
We may decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, We guarantee
that they will not increase. We bear the risk that such charges will not cover
Our costs. On the other hand, should such charges exceed Our costs, We will not
refund any charges. Any profit is available for corporate purposes including,
among other things, payment of distribution expenses.
    
 
   
We may also offer reduced fees and charges, including but not limited to,
Records Maintenance Charge and mortality and expense risk and administrative
charges, for certain sales that may result in cost savings. Reductions in these
fees and charges will not unfairly discriminate against any Owner.
    
 
                               THE ANNUITY PERIOD
 
   
Contracts may be annuitized under one of several Annuity Options, which are
available either on a fixed or variable basis. Annuity payments begin on the
Annuity Date under the Annuity Option selected by the Owner.
    
 
1. ANNUITY PAYMENTS.
 
   
Annuity payments are based on:
    
 
   
     - the annuity table specified in the Contract,
    
 
   
     - the selected Annuity Option, and
    
 
   
     - the investment performance of the selected Subaccount(s) (if variable
       annuitization is elected).
    
 
   
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly. Annuity payments may be subject to a Withdrawal Charge. (For
additional details, see "Withdrawal Charge.")
    
 
2. ANNUITY OPTIONS.
 
   
The Owner may elect one of the Contract's Annuity Options. The Owner may decide
at any time (subject to the provisions of any applicable retirement plan and
state variations) to begin annuity payments. The Owner may change the Annuity
Option before the Annuity Date. If no other Annuity Option is elected,
    
 
22
<PAGE>   27
 
   
monthly annuity payments are made in accordance with Option 3 below with a 10
year period certain. Generally, annuity payments are made in monthly
installments. However, We may make a lump sum payment if the net proceeds
available to apply under an Annuity Option are less than $4,000. In addition, if
the first monthly payment is less than $50 We may change the frequency of
payments to quarterly, semiannual or annual intervals so that the initial
payment is at least $50.
    
 
   
The amount of periodic annuity payments may depend upon:
    
 
   
     - the Annuity Option selected;
    
 
   
     - the age of the payee; and
    
 
   
     - the investment experience of the selected Subaccount(s).
    
 
   
     For example:
    
 
   
        - if Option 1, income for a specified period, is selected, shorter
          periods result in fewer payments with higher values.
    
 
   
        - if Option 2, life income, is selected, it is likely that each payment
          will be smaller than would result if income for a short period were
          specified.
    
 
   
        - if Option 3, life income with installments guaranteed, is selected,
          each payment will probably be smaller than would result if the life
          income option were selected.
    
 
   
        - if Option 4, the joint and survivor annuity, is selected, each payment
          is smaller than those measured by an individual life income option.
    
 
   
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. Finally, if the Owner participates in a Subaccount with higher
investment performance, it is likely the Owner will receive a higher periodic
payment.
    
 
   
If the Beneficiary is not an individual, the entire interest must be distributed
within 5 years of the Owner's death. The Death Benefit distribution must begin
no later than one year from the Owner's death, unless a later date is prescribed
by federal regulation.
    
 
   
For Non-Qualified Contracts, if the Owner dies before the Annuity Date,
available Annuity Options are limited. The Annuity Options available are:
    
 
   
     - Option 2 or
    
 
   
     - Option 1 or 3 for a period no longer than the life expectancy of the
       Beneficiary (but not less than 5 years from the Owner's death).
    
 
   
OPTION 1--INCOME FOR SPECIFIED PERIOD.
    
 
   
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, We automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), We pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, We continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
    
 
23
<PAGE>   28
 
   
Payees may elect to cancel all or part of the remaining payments due under
Option 1. We will then pay the discounted value of the remaining payments.
    
 
   
OPTION 2--LIFE INCOME.
    
 
   
Option 2 provides for an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death 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.
    
 
   
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
may be five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, We pay the discounted value of the remaining payments in the
specified period.
    
 
   
OPTION 4--JOINT AND SURVIVOR ANNUITY.
    
 
   
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
    
 
   
3. ALLOCATION OF ANNUITY.
    
 
   
The Owner may elect payments on a fixed or variable basis, or a combination. Any
Guarantee Period Value is annuitized on a fixed basis. Any Separate Account
Contract Value is annuitized on a variable basis. The MVA Option is not
available during the Annuity Period. An Owner may exercise the transfer
privilege during the Accumulation Period. Transfers during the Annuity Period
are subject to certain limitations.
    
 
   
4. TRANSFER DURING ANNUITY PERIOD.
    
 
   
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount or to the Fixed
Account, subject to the following limitations:
    
 
   
     - Transfers to a Subaccount are prohibited during the first year of the
       Annuity Period; subsequent transfers are limited to one per year.
    
 
   
     - All interest in a Subaccount must be transferred.
    
 
   
     - If We receive notice of transfer to a Subaccount more than 7 days before
       an annuity payment date, the transfer is effective during the Valuation
       Period after the date We receive the notice.
    
 
   
     - If We receive notice of transfer to a Subaccount less than 7 days before
       an annuity payment date, the transfer is effective during the Valuation
       Period after the annuity payment date.
    
 
   
     - Transfers to the General Account are available only on an anniversary of
       the first Annuity Date. We must receive notice at least 30 days prior to
       the anniversary.
    
 
   
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
    
 
24
<PAGE>   29
 
   
5. ANNUITY UNIT VALUE.
    
 
   
Annuity Unit value is determined independently for each Subaccount.
    
 
   
Annuity Unit value for any Valuation Period is:
    
 
   
     - Annuity Unit value for the preceding Valuation Period times
    
 
   
     - the net investment factor for the current Valuation Period times
    
 
   
     - an interest factor which offsets the 4% per annum rate of investment
       earnings assumed by the Contract's annuity tables.
    
 
   
The net investment factor for a Subaccount for any Valuation Period is:
    
 
   
     - the Subaccount's Accumulation Unit value at the end of the current
       Valuation Period, plus or minus the per share charge or credit for taxes
       reserved; divided by
    
 
   
     - the Subaccount's Accumulation Unit value at the end of the preceding
       Valuation Period, plus or minus the per share charge or credit for taxes
       reserved.
    
 
   
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
    
 
   
When annuity payments begin, the value of the Owner's Contract interest is:
    
 
   
     - Accumulation Unit values at the end of the Valuation Period falling on
       the 20th or 7th day of the month before the first annuity payment is due
       times
    
 
   
     - the number of Accumulation Units credited at the end of the Valuation
       Period minus
    
 
   
     - premium taxes and Withdrawal Charges
    
 
   
The first annuity payment is determined by multiplying the benefit per $1,000 of
value shown in the applicable annuity table by the number of thousands of
dollars of Contract Value.
    
 
   
A 4% per annum rate of investment earnings is assumed by the Contract's annuity
tables. If the actual net investment earnings rate exceeds 4% per annum,
payments increase accordingly. Conversely, if the actual rate is less than 4%
per annum, annuity payments decrease.
    
 
   
7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
    
 
   
Subsequent annuity payments are determined by multiplying the number of Annuity
Units by the Annuity Unit value at the Valuation Period before each annuity
payment is due. The first annuity payment is divided by the Annuity Unit value
as of the Annuity Date to establish the number of Annuity Units representing
each annuity payment. This number does not change.
    
 
   
8. FIXED ANNUITY PAYMENTS.
    
 
   
Each Fixed Annuity payment is determined from tables We prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated to a Fixed
Annuity. Payment is based on the Contract Value at the date before the annuity
payment is due. Fixed Annuity payments do not change regardless of investment,
mortality or expense experience.
    
 
                                                                              25
<PAGE>   30
 
   
9. DEATH PROCEEDS.
    
 
   
If the payee dies after the Annuity Date while the Contract is in force, the
death benefit, if any, depend upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
    
 
   
                              FEDERAL INCOME TAXES
    
 
   
A. INTRODUCTION
    
 
   
This discussion is not exhaustive and is not intended as tax advice. A qualified
tax adviser should always be consulted with regard to the application of the law
to individual circumstances. This discussion is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Department regulations, and
interpretations existing on the date of this Prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and
judicial decisions.
    
 
   
This discussion does not address state or local tax consequences associated with
buying a Contract. In addition, WE MAKE NO GUARANTEE REGARDING ANY TAX
TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION
INVOLVING A CONTRACT.
    
 
   
B. OUR TAX STATUS
    
 
   
We are taxed as a life insurance company and the operations of the Separate
account are treated as a part of Our total operations. The Separate Account is
not separately taxed as a "regulated investment company". Investment income and
capital gains of the Separate Account are not taxed to the extent they are
applied under a Contract. We do not anticipate that We will incur federal income
tax liability attributable to the income and gains of the Separate Account, and
therefore We do not intend to provide for these taxes. If We are taxed on
investment income or capital gains of the Separate Account, then We may impose a
charge against the Separate Account to provide for these taxes.
    
 
   
C. TAXATION OF ANNUITIES IN GENERAL
    
 
   
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
    
 
   
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Contract are generally not taxable to the Owner or Annuitant until
received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
    
 
   
     - the Contract must be owned by an individual
    
 
   
     - Separate Account investments must be "adequately diversified"
    
 
   
     - We, rather than the Owner, must be considered the owner of Separate
       Account assets for federal tax purposes, and
    
 
   
     - annuity payments must appropriately amortize Purchase Payments and
       Contract earnings.
    
 
   
NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons", such as corporations, trusts or similar entities, are not
annuity contracts for federal income tax purposes. The investment income on
these contracts is taxed as ordinary income received or accrued by the
non-natural owner. There are exceptions to this general rule for non-natural
owners. Contracts are generally treated as held by a natural person if the
nominal owner is a trust or other entity holding the contract as an agent for a
natural person. However, this special exception does not apply to an employer
who is the nominal owner of a contract under a non-qualified deferred
compensation plan for its employees.
    
 
26
<PAGE>   31
 
   
Additional exceptions to this rule include:
    
 
   
     - contracts acquired by a decedent's estate
    
 
   
     - certain Qualified Contracts
    
 
   
     - Contracts purchased by employers at termination of certain qualified
       plans
    
 
   
     - Contracts used with structured settlement agreements
    
 
   
     - Contracts purchased with a single premium when the annuity starting date
       is no later than a year from Contract purchase and substantially equal
       periodic payments are made at least annually.
    
 
   
DIVERSIFICATION REQUIREMENTS. For a contract to be treated as an annuity for
federal income tax purposes, separate account investments must be "adequately
diversified". The Treasury Secretary issued regulations prescribing standards
for adequately diversifying separate account investments. If the separate
account failed to comply with these diversification standards, the Contract
would not be treated as an annuity contract for federal income tax purposes and
the Owner would generally be taxed on the difference between Contract Value and
Purchase Payments.
    
 
   
Although We do not control Fund investments, We expect the Fund will comply with
these regulations so that the Separate Account will be considered "adequately
diversified."
    
 
   
OWNERSHIP TREATMENT. In certain circumstances, a variable annuity contract owner
may be considered the owner of the assets of the separate account supporting the
contract. In those circumstances, income and gains from separate account assets
are includible in the owner's gross income. The IRS, in published rulings,
stated that a variable contract owner will be considered the owner of separate
account assets if the owner possesses the ability to exercise investment control
over the assets. As of the date of this Prospectus, no investor control guidance
is available.
    
 
   
We may modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Separate Account assets.
    
 
   
DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when the Annuitant has reached an advanced age, E.G., past age 85, the Contract
might not be treated as an annuity for federal income tax purposes. In that
event, the income and gains under the Contract could be currently includible in
the Owner's income.
    
 
   
The following discussion assumes that the Contract is treated as an annuity
contract for tax purposes and that We are treated as the owner of Separate
Account assets.
    
 
   
2. TAXATION OF PARTIAL AND FULL WITHDRAWALS
    
 
   
Partial withdrawals from a Non-Qualified Contract are includible in income if
Contract Value before the withdrawal exceeds the "investment in the contract."
Full withdrawals are also includible in income if they exceed the "investment in
the contract." Investment in the contract equals the total of Purchase Payments
minus amounts previously received from the Contract.
    
 
   
Any assignment or pledge (or agreement to assign or pledge) of Contract Value,
is treated as a withdrawal. Investment in the contract is increased by the
amount includible in income with respect to such assignment or pledge. If an
individual transfers a Contract interest without adequate consideration to
someone other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner is taxed on the difference between the Contract Value and
the "investment in the contract." In this case, the transferee's investment in
the contract is increased to reflect the increase in the transferor's income.
    
                                       27
<PAGE>   32
 
   
The Contract's death benefit may exceed Purchase Payments or Contract Value. As
described in this Prospectus, We impose certain charges with respect to the
death benefit. It is possible that those charges (or some portion) could be
treated as a partial withdrawal.
    
 
   
There may be special income tax issues present in situations where the Owner and
the Annuitant are not the same person and are not married to one another. A tax
adviser should be consulted in those situations.
    
 
   
3. TAXATION OF ANNUITY PAYMENTS
    
 
   
Normally, the portion of each annuity payment taxable as income equals the
payment minus the exclusion amount. The exclusion amount for variable annuity
payments is the "investment in the contract" allocated to the variable annuity
option and adjusted for any period certain or refund feature, divided by the
number of payments expected to be made. The exclusion amount for fixed annuity
payments is the payment times the ratio of the investment in the contract
allocated to the fixed annuity option and adjusted for any period certain or
refund feature, to expected value of all annuity payments.
    
 
   
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments stop because
the Annuitant dies before the total amount of the investment in the contract is
recovered, the unrecovered amount generally is allowed as a deduction to the
Annuitant in the last taxable year.
    
 
   
4. TAXATION OF DEATH BENEFITS
    
 
   
Amounts may be distributed upon the Owner's or Annuitant's death. Before the
Annuity Date, death benefits are includible in income and:
    
 
   
     - if distributed in a lump sum are taxed like a full withdrawal, or
    
 
   
     - if distributed under an annuity option are taxed like annuity payments.
    
 
   
After the Annuity Date, where a guaranteed period exists and the Annuitant dies
before the end of that period, payments made to the Beneficiary for the
remainder of that period are includible in income and:
    
 
   
     - if received in a lump sum are includible in income if they exceed the
       unrecovered investment, or
    
 
   
     - if distributed in accordance with the selected annuity option are fully
       excludable from income until the remaining investment in the contract is
       deemed to be recovered,
    
 
   
Thereafter, all annuity payments are fully includible in income.
    
 
   
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
    
 
   
A 10% penalty tax applies to a taxable payment from a Non-Qualified Contract
unless:
    
 
   
     - received on or after the Owner reaches age 59 1/2
    
 
   
     - attributable to the Owner's disability
    
 
   
     - made to a Beneficiary after the Owner's death or, for non-natural Owners,
       after the primary Annuitant's death
    
 
   
     - made as a series of substantially equal periodic payments (at least
       annually) for the life (or life expectancy) of the Annuitant or for the
       joint lives (or joint life expectancies) of the Annuitant and designated
       Beneficiary
    
 
                                       28
<PAGE>   33
 
   
     - made under a Contract purchased with a single premium when the annuity
       starting date is no later than a year from Contract purchase and
       substantially equal periodic payments are made at least annually
    
 
   
     - made with annuities used with structured settlement agreements
    
 
   
6. AGGREGATION OF CONTRACTS
    
 
   
The taxable amount of an annuity payment or withdrawal from a Non-Qualified
Contract is determined by combining some or all of the Non-Qualified Contracts
owned by an individual. For example, if a person purchases a Contract and also
purchases an immediate annuity at approximately the same time, the IRS may treat
the two contracts as one contract. In addition, if a person purchases two or
more deferred annuity contracts from the same company (or its affiliates) during
any calendar year, these contracts are treated as one contract. The effects of
this aggregation are not clear. However, it could affect the taxable amount of
an annuity payment or withdrawal and the amount which might be subject to the
10% penalty tax.
    
 
   
7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
   CERTAIN NON-NATURAL PERSONS
    
 
   
For Contracts issued after June 8, 1997 to a non-natural owner, otherwise
deductible interest may no longer be deductible by the owner. However, this
interest deduction disallowance does not affect Contracts generating taxable
income. Entities considering purchasing the Contract, or entities that will be
beneficiaries under a Contract, should consult a tax adviser.
    
 
   
D. QUALIFIED PLANS
    
 
   
Qualified Contracts are used with retirement plans which receive favorable tax
treatment as Individual Retirement Annuities, Simplified Employee
Pensions--IRAs, Roth Individual Retirement Annuities, tax sheltered annuities,
and certain deferred compensation plans ("Qualified Plans"). Numerous special
tax rules apply to Qualified Plans and to Qualified Contracts. Therefore, We
make no attempt to provide more than general information about use of Qualified
Contracts.
    
 
   
The tax rules applicable to qualified plans vary according to the type, terms
and conditions of the plan. For example, for both withdrawals and annuity
payments under certain Qualified Contracts, there may be no "investment in the
contract" and the total amount received may be taxable. Both the amount of the
permitted contribution, and the corresponding deduction or exclusion, are
limited under qualified plans. In Qualified Contracts, the Owner and Annuitant
must be the same individual. If a joint Annuitant is named and the Annuitant is
alive, all distributions must be made to the Annuitant. Also, if the joint
Annuitant is not the Annuitant's spouse, the annuity options may be limited,
depending on the difference in their ages. Furthermore, the length of any
Guarantee Period may be limited in some circumstances to satisfy certain minimum
distribution requirements under the Code.
    
 
   
Under a Qualified Contract, rules specify the form of distribution and
commencement dates. An excise tax is imposed for failure to comply with minimum
distribution requirements. This excise tax generally equals 50% of the amount by
which a minimum required distribution exceeds the actual distribution. In the
case of Individual Retirement Annuities, distributions of minimum amounts must
generally begin by April 1 of the calendar year following the calendar year in
which the owner attains age 70 1/2.
    
 
                                       29
<PAGE>   34
 
   
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Contracts. For Individual Retirement Annuities, the penalty tax does not apply
to a payment:
    
 
   
     - received after the Owner reaches age 59 1/2
    
 
   
     - received after the Owner's death or because of the Owner's disability
    
 
   
     - made as a series of substantially equal periodic payments (at least
       annually) for the life (or life expectancy) of the Owner or for the joint
       lives (or joint life expectancies) of the Owner and designated
       Beneficiary
    
 
   
In addition, the penalty tax does not apply to certain distributions taken after
December 31, 1997 used for qualified first time home purchases or for higher
education expenses. Special conditions must be met to qualify for these
exceptions. Owners wishing to take a distribution for these purposes should
consult their tax adviser. Other exceptions may apply.
    
 
   
Qualified Contracts are amended to conform to plan requirements. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under qualified plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, We are not bound by terms and conditions of qualified
plans if they are inconsistent with the Contract.
    
 
   
1. QUALIFIED PLAN TYPES
    
 
   
We issue Contracts for the following types of qualified plans.
    
 
   
INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to
contribute to an individual retirement annuity known as an "IRA." IRAs limit the
amounts contributed, the persons eligible and the time when distributions start.
Also, subject to direct rollover and mandatory withholding requirements,
distributions from other types of Qualified Plans may be "rolled over" on a
tax-deferred basis into an IRA. The Contract may not fund an "Education IRA."
    
 
   
IRAs generally may not provide life insurance coverage, but they may provide a
death benefit that equals the greater of the premiums paid and the Contract
Value. The Contract's death benefit may exceed Purchase Payments or Contract
Value. It is possible that the death benefit could be viewed as violating the
prohibition on investment in life insurance contracts and failing IRA
requirements.
    
 
   
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). The Code allows employers to establish
simplified employee pension plans, using the employees' IRAs. Under these plans
the employer may make limited deductible contributions on behalf of the
employees to IRAs. Employers and employees intending to use the Contract in
connection with these plans should seek competent tax advice.
    
 
   
SIMPLE IRAS. The Code permits certain small employers to establish "SIMPLE
retirement accounts," including SIMPLE IRAs, for their employees. Under SIMPLE
IRAs, certain deductible contributions are made by both employees and employers.
SIMPLE IRAs are subject to various requirements, including limits on the amounts
that may be contributed, the persons who may be eligible, and the time when
distributions may commence. As discussed above (see Individual Retirement
Annuities), there is some uncertainty regarding the proper characterization of
the Contract's death benefit for purposes of the tax rules governing IRAs (which
would include SIMPLE IRAs). Employers and employees intending to use the
Contract with such plans should seek competent advice.
    
 
                                       30
<PAGE>   35
 
   
ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in that:
    
 
   
     - Roth IRA contributions are never deductible,
    
 
   
     - "qualified distributions" from a Roth IRA are excludable from income,
    
 
   
     - different eligibility and mandatory distribution requirements apply,
    
 
   
     - a rollover to a Roth IRA must be a "qualified rollover contribution,"
       under the Code.
    
 
   
For a rollover from a non-Roth IRA to a Roth IRA, amounts which would have been
includible in gross income but for the qualified rollover contribution are
includible in gross income, without application of the 10 percent penalty tax.
    
 
   
An IRA may be converted into a Roth IRA without taking a distribution. An
individual may convert by notifying the IRA issuer or trustee. The conversion of
an IRA to a Roth IRA is a special type of qualified rollover distribution.
Hence, the IRA participant must be eligible for a qualified rollover
distribution to convert an IRA to a Roth IRA. A conversion typically results in
the inclusion of some or all of the IRA value in gross income. Persons with
adjusted gross incomes in excess of $100,000 or who are married and file a
separate return are not eligible to make a qualified rollover contribution or a
transfer in a taxable year from a non-Roth IRA to a Roth IRA.
    
 
   
Any "qualified distribution" from a Roth IRA is excludible from gross income. A
"qualified distribution" is:
    
 
   
     - a payment or distribution
    
 
   
      -- made after the Owner attains age 59 1/2,
    
 
   
      -- made after the Owner's death,
    
 
   
      -- attributable to the Owner being disabled, or
    
 
   
      -- made to a qualified first-time homebuyer.
    
 
   
     - a payment or distribution made in a taxable year that is five years or
       more after
    
 
   
      -- the first taxable year for which a contribution was made to the Owner's
         Roth IRA, or
    
 
   
      -- the first taxable year for which rollover was made to the Owner's Roth
         IRA. A non-qualified distribution from a Roth IRA is generally taxed
         like a distribution from an IRA. Distributions from a Roth IRA need not
         commence at age 70 1/2.
    
 
   
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in section 501(c)(3) of the Code to have
their employers purchase annuity Certificates for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity Contracts are commonly referred to as "tax-sheltered
annuities". Purchasers of the Contracts for such purposes should seek competent
advice as to eligibility, limitations on permissible amounts of purchase
payments and other tax consequences associated with the Contracts. In
particular, purchasers should consider that the Contract provides a death
benefit that in certain circumstances may exceed the greater of the Purchase
Payments and the Contract Value. It is possible that such death benefit could be
characterized as an incidental death benefit. If the death benefit were so
characterized, this could result in currently taxable income to purchasers. In
addition, there are limitations on the amount of incidental benefits that may be
provided under a tax-sheltered annuity. Even if the death benefit under the
Contract were characterized as an incidental death benefit, it is unlikely to
violate those limits unless the Contract Owner also purchases a life insurance
contract as part of the Owner's tax-sheltered annuity plan.
    
 
                                       31
<PAGE>   36
 
   
Tax-sheltered annuity Contracts must contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1988. These amounts can be paid only if
the employee has reached age 59 1/2, separated from service, died, or becomes
disabled (within the meaning of the tax law), or in the case of hardship (within
the meaning of the tax law). Amounts permitted to be distributed in the event of
hardship are limited to actual contributions; earnings thereon cannot be
distributed on account of hardship. Amounts subject to the withdrawal
restrictions applicable to section 403(b)(7) custodial accounts may be subject
to more stringent restrictions. (These limitations on withdrawals do not apply
to the extent We are directed to transfer some or all of the Contract Value to
the issuer of another tax-sheltered annuity or into a section 403(b)(7)
custodial account.)
    
 
   
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. The Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. Generally, a Contract purchased by a state or local
government or a tax-exempt organization will not be treated as an annuity
contract for federal income tax purposes. Those who intend to use the Contracts
in connection with such plans should seek competent advice.
    
 
2. DIRECT ROLLOVERS
 
   
If the Contract is used with a retirement plan that is qualified under sections
401(a), 403(a), or 403(b) of the Code, any "eligible rollover distribution" from
the Contract will be subject to "direct rollover" and mandatory withholding
requirements. An eligible rollover distribution generally is any taxable
distribution from such a qualified retirement plan, excluding certain amounts
such as (i) minimum distributions required under section 401(a)(9) of the Code,
and (ii) certain distributions for life, life expectancy, or for 10 years or
more which are part of a "series of substantially equal periodic payments."
    
 
   
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, the Owner cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply if,
instead of receiving the eligible rollover distribution, the distributee elects
to have it directly transferred to certain Qualified Plans. Prior to receiving
an eligible rollover distribution, a notice will be provided explaining
generally the direct rollover and mandatory withholding requirements and how to
avoid the 20% withholding by electing a direct rollover.
    
 
E. FEDERAL INCOME TAX WITHHOLDING
 
   
We withhold and send to the U.S. Government a part of the taxable portion of
each distribution unless the payee notifies Us before distribution of an
available election not to have any amounts withheld. In certain circumstances,
We may be required to withhold tax. The withholding rates for the taxable
portion of periodic annuity payments are the same as the withholding rates for
wage payments. In addition, the withholding rate for the taxable portion of
non-periodic payments (including withdrawals prior to the maturity date and
conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%. The
withholding rate for eligible rollover distributions is 20%.
    
 
                                       32
<PAGE>   37
 
                           DISTRIBUTION OF CONTRACTS
 
   
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, We may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
    
 
   
                       Investors Brokerage Services, Inc. ("IBS")
    
   
                       1 Kemper Drive
    
   
                       Long Grove, Illinois, 60049
    
 
   
IBS is Our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
are not available to all Owners. The investment options are available only under
Contracts that are sold or serviced by broker-dealers having a selling group
agreement with IBS authorizing the sale of Contracts with the investment options
specified in this Prospectus. Other distributors may sell and service contracts
with different investment options.
    
 
                                 VOTING RIGHTS
 
   
Proxy materials in connection with any Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts We have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.
    
 
   
Owners have voting rights in a Portfolio based upon the Owner's proportionate
interest in the corresponding Subaccount as measured by units. Owners have
voting rights before surrender, the Annuity Date or the death of the Annuitant.
Thereafter, the payee entitled to receive Variable Annuity payments has voting
rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity
Units decrease.
    
 
   
                    REPORTS TO CONTRACT OWNERS AND INQUIRIES
    
 
   
After each Contract anniversary, We send Owners a statement showing amounts
credited to each Subaccount and to the Guarantee Period Value. In addition,
Owners transferring amounts among the investment options or making additional
payments receive written confirmation of these transactions. We will also send a
current statement upon Owner request. Owners are also sent annual and
semi-annual reports for the Portfolios that correspond to the Subaccounts in
which the Owner invests and a list of the securities held by that Portfolio. In
addition, We calculate for an Owner the portion of a total amount that must be
invested in a selected Guarantee Period so that the portion grows to equal the
original total amount at the expiration of the Guarantee Period.
    
 
   
An Owner may direct inquiries to the selling agent or may call 1-800-621-5001 or
write to Kemper Investors Life Insurance Company, Customer Service, 1 Kemper
Drive, Long Grove, Illinois 60049.
    
 
                                       33
<PAGE>   38
 
                             DOLLAR COST AVERAGING
 
   
We offer two different dollar cost averaging programs where an Owner may
predesignate a portion of Subaccount Value under a Contract to be automatically
transferred on a monthly basis to one or more of the other Subaccounts during
the Accumulation Period. The first dollar cost averaging program is available
only for initial Purchase Payments and an Owner must enroll in the program at
the time the Contract is issued. An Owner may allocate all or a portion of the
initial Purchase Payment to Kemper Money Market Subaccount #2, which is the only
Subaccount with no deduction for the 1.25% daily asset-based charge for
mortality and expense risks and administrative costs. The Owner must transfer
all of the Subaccount Value out of Kemper Money Market Subaccount #2 to one or
more of the other Subaccounts within three years from the initial Purchase
Payment. If an Owner terminates dollar cost averaging or does not deplete all
Contract Value in Kemper Money Market Subaccount #2 within three years, We will
automatically transfer any remaining Subaccount Value in Kemper Money Market
Subaccount #2 to Kemper Money Market Subaccount #1.
    
 
   
The other dollar cost averaging program is available for Purchase Payments and
for Contract Value transferred into Kemper Money Market Subaccount #1 or Kemper
Government Securities Subaccount. An Owner may predesignate a portion of
Subaccount Value to be automatically transferred on a monthly basis to one or
more of the other Subaccounts. An Owner may enroll in this program at the time
the Contract is issued or anytime thereafter by properly completing the Dollar
Cost Averaging enrollment form and returning it to Us at its home office at
least 5 business days prior to the second Tuesday of a month ("Transfer Date").
    
 
   
Under each program, transfers will be made in the amounts designated by the
Owner and must be at least $500 per Subaccount. The total Contract Value in the
applicable Subaccount at the time Dollar Cost Averaging is elected must be at
least equal to the amount designated on each Transfer Date multiplied by the
duration selected. Dollar Cost Averaging stops automatically if the Contract
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 ends if:
    
 
   
     - the number of designated monthly transfers has been completed
    
 
   
     - Contract Value in the transferring account is insufficient to complete
       the next transfer; the remaining amount is transferred
    
 
   
     - We receive the Owner's written termination at least two business days
       before the next transfer date, or
    
 
   
     - the Contract is surrendered or annuitized.
    
 
   
An Owner may initiate, reinstate or change Dollar Cost Averaging from Kemper
Money Market Subaccount #1 or Kemper Government Securities Subaccount or change
existing Dollar Cost Averaging terms for Kemper Money Market Subaccount #2 by
completing the new enrollment form and returning it to Us at Our home office at
least 5 business days prior to the next Transfer Date such transfer is to be
made.
    
 
   
When utilizing Dollar Cost Averaging an Owner must be invested in Kemper Money
Market Subaccount #1, Kemper Money Market Subaccount #2, or Kemper Government
Securities Subaccount and may be invested in any other Subaccounts. Election of
Dollar Cost Averaging is not available during the Annuity Period.
    
 
                                       34
<PAGE>   39
 
                           SYSTEMATIC WITHDRAWAL PLAN
 
   
We offer a Systematic Withdrawal Plan ("SWP") allowing Owners to pre-authorize
periodic withdrawals during the Accumulation Period. Owners instruct Us to
withdraw selected amounts from the Subaccounts or Guarantee Periods on a
monthly, quarterly, semi-annual or annual basis. The SWP is available to Owners
who request a minimum $100 periodic payment. A market value adjustment applies
to any withdrawals under the SWP from a Guarantee Period, unless effected within
15 days before or 15 days after the Guarantee Period ends. If the amounts
distributed under the SWP from the Subaccounts or Guarantee Periods exceed the
free withdrawal amount, the Withdrawal Charge is applied on any amounts
exceeding the free withdrawal amount. WITHDRAWALS TAKEN UNDER THE SWP MAY BE
SUBJECT TO THE 10% TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME TAXES AND MAY
BE SUBJECT TO 20% WITHHOLDING. Owners interested in SWP may obtain an
application and information concerning this program and its restrictions from Us
or their agent. We give thirty days' notice if We amend the SWP. The SWP may be
terminated at any time by the Owner or Us.
    
 
                                    EXPERTS
 
   
The consolidated balance sheets of KILICO as of December 31, 1998 and 1997 and
the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1998 and
1997 have been included herein and in the registration statement in reliance
upon the report of PricewaterhouseCoopers LLP, independent public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of KILICO and
Subsidiaries for the period from January 4, 1996 to December 31, 1996 and the
financial statement schedules as of December 31, 1996 have been included herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
    
 
                                 LEGAL MATTERS
 
   
Legal matters with respect to Our organization, Our authority to issue annuity
contracts and the validity of the Contract, have been passed upon by Debra P.
Rezabek, Our Senior Vice President, General Counsel and Corporate Secretary.
Jorden Burt Boros Cicchetti Berenson & Johnson, Washington, D.C., has advised Us
on certain legal matters concerning federal securities laws applicable to the
issue and sale of the Contracts.
    
 
   
                             SPECIAL CONSIDERATIONS
    
 
   
We reserve the right to amend the Contract to meet the requirements of federal
or state laws or regulations. We will notify the Owner in writing of these
amendments.
    
 
   
An Owner's rights under a Contract may be assigned as provided by law. An
assignment will not be binding upon Us until We receive a written copy of the
assignment. The Owner is solely responsible for the validity or effect of any
assignment. The Owner, therefore, should consult a qualified tax advisor
regarding the tax consequences, as an assignment may be a taxable event.
    
 
                                       35
<PAGE>   40
 
   
                             AVAILABLE INFORMATION
    
 
   
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and file reports and other information with the SEC. These reports and
other information can be inspected and copied at the SEC's public reference
facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500 West
Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies also
can be obtained from the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
    
 
   
We have filed registration statements (the "Registration Statements") relating
to the Contracts with the SEC under the Securities Act of 1933. This Prospectus
has been filed as part of the Registration Statements and does not contain all
of the information set forth in the Registration Statements. These Registration
Statements contain further information about Us and the Contracts. The
Registration Statements may be inspected and copied, and copies can be obtained
at prescribed rates, as mentioned above.
    
 
                                       36
<PAGE>   41
 
   
                                    BUSINESS
    
 
   
CORPORATE STRUCTURE
    
 
   
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. We are licensed
in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company.
    
 
   
CORPORATE CONTROL EVENTS
    
 
   
Effective January 4, 1996, Zurich Insurance Company ("Zurich"), Insurance
Partners, L.P. ("IP") and Insurance Partners Offshore (Bermuda), L.P. (together
with IP, "Insurance Partners") owned 80 percent and 20 percent, respectively, of
Kemper and therefore KILICO. On February 27, 1998, Zurich acquired Insurance
Partner's remaining 20 percent interest for cash. As a result of this
transaction, Kemper and KILICO became wholly-owned subsidiaries of Zurich.
    
 
   
Effective September 7, 1998, the businesses of Zurich merged with the financial
services business of B.A.T. Industries forming Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG, representing
the financial interest of the former Zurich Group, is listed on the Swiss Market
Index, replacing Zurich. Allied Zurich p.l.c., representing the financial
interest of B.A.T. Industries, is included in the FTSE-100 Share Index in
London.
    
 
   
The acquisition of KILICO on January 4, 1996, was accounted for using the
purchase method of accounting. Our consolidated financial statements prior to
January 4, 1996, were prepared on a historical cost basis and have been labeled
as "preacquisition" where appropriate in this Prospectus. Our included
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles.
    
 
   
We originally began to amortize goodwill resulting from the acquisition on a
straight-line basis over twenty-five years. However, in the fourth quarter of
1997, We changed Our amortization period to twenty years. The change in
amortization periods was made to conform to Zurich's accounting practices and
policies. The change resulted in an increase in goodwill amortization of $5.1
million in 1997.
    
 
   
STRATEGIC INITIATIVES
    
 
   
Our management, operations and strategic directions are integrated with those of
another Kemper subsidiary, Federal Kemper Life Assurance Company ("FKLA"). The
integration streamlined management, controlled costs, improved profitability,
increased operating efficiencies and productivity, and helped to expand both
companies' distribution capabilities. Headquartered in Long Grove, Illinois,
FKLA markets term and interest-sensitive life insurance, as well as certain
annuity products through brokerage general agents and other independent
distributors.
    
 
   
Over the last several years, We increased the competitiveness of Our variable
annuity products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1996, We
introduced a registered flexible individual variable life insurance product. In
1997, We introduced a non-registered individual and group variable bank-owned
life insurance contract ("BOLI") and a series of individual variable life
insurance contracts. In 1998, We introduced a new registered individual variable
annuity product with 29 variable subaccount investment options and various
investment managers.
    
 
                                       37
<PAGE>   42
 
   
NARRATIVE DESCRIPTION OF BUSINESS
    
 
   
We offer both individual fixed-rate (general account) and individual and group
variable (separate account) annuity contracts, as well as individual term life,
universal life and individual and group variable life insurance products through
various distribution channels. We offer investment-oriented products, guaranteed
returns or a combination of both, to help policyholders meet multiple insurance
and financial objectives. Financial institutions, securities brokerage firms,
insurance agents and financial planners are important distribution channels for
Our products. Our sales mainly consist of deposits received on certain long
duration annuity and variable life insurance contracts as well as reinsurance
premiums assumed from FKLA beginning in 1996.
    
 
   
Our fixed and variable annuities generally have surrender charges that are a
specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
    
 
   
Over the last several years, in part reflecting the current interest rate
environment, We have increased Our emphasis on marketing Our existing and new
separate account products. Unlike the fixed-rate annuity business where We
manage spread revenue, such variable products pose minimal investment risk for
Us, as policyholders direct their premium to one or more subaccounts that invest
in underlying investment funds. We, in turn, receive administrative fee revenue
on such variable products which compensates Us for providing death benefits
potentially in excess of cash surrender values. In addition, on variable life
insurance contracts, cost of insurance charges compensate Us for providing death
benefit coverage substantially in excess of surrender values.
    
 
   
As a result of this strategy, Our separate account assets and related sales of
Our variable annuity and life products have increased as follows (in millions):
    
 
   
<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                         ------------------------------
                                                           1998       1997       1996
                                                         --------   --------   --------
<S>                                                      <C>        <C>        <C>
Separate account assets................................  $7,099.2   $5,122.0   $2,127.2
                                                         ========   ========   ========
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                         ------------------------------
                                                           1998       1997       1996
                                                         --------   --------   --------
<S>                                                      <C>        <C>        <C>
Variable annuity sales.................................  $  300.4   $  259.8   $  254.6
Variable life sales....................................   1,523.0    2,708.6         .2
                                                         --------   --------   --------
  Total separate account sales.........................  $1,823.4   $2,968.4   $  254.8
                                                         ========   ========   ========
</TABLE>
    
 
   
In 1996, We added several new subaccounts and new investment managers as
investment portfolio choices for certain purchasers of the Kemper Advantage III
variable annuity product. During mid-1998, We introduced Destinations, a
registered individual variable annuity product. Destinations offers 29 variable
subaccount investment options with various investment managers, ten guarantee
period accounts and a fixed account, dollar cost averaging and a guaranteed
retirement income benefit option.
    
 
   
During late 1996, We introduced Power V, a registered flexible premium variable
life insurance product. During mid-1997, We also introduced variable BOLI, a
group variable life insurance contract that is primarily marketed to banks and
other large corporate entities. Also in 1997, We issued a series of non-
registered variable individual universal life insurance contracts that are
marketed primarily to high net worth individuals. Significant fluctuations in
Our sales of the variable life products are due mainly to the nature of the BOLI
product--high dollar volume per sale, low frequency of sales--and the
uncertainty surrounding
    
 
                                       38
<PAGE>   43
 
   
BOLI's tax advantaged status since the release of the Clinton Administration's
Fiscal Year 1998 Budget, continuing with the release of the 1999 Budget.
    
 
   
Investors Brokerage Services, Inc. ("IBS"), Our wholly-owned subsidiary, is the
principal underwriter and distributor of the variable annuity and variable life
products. Another Zurich affiliate is the principal underwriter and distributor
for the BOLI and high net worth products.
    
 
   
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted Our general account annuity sales over the last
several years. Our general account fixed annuity sales were as follows (in
millions):
    
 
   
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31
                                                              ------------------------
                                                               1998     1997     1996
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
General account fixed annuity sales.........................  $179.9   $145.7   $140.6
                                                              ======   ======   ======
</TABLE>
    
 
   
Strong stock and bond markets during 1996 and most of 1997, which influenced
potential buyers of fixed annuity products to purchase variable annuity
products, caused sales of general account annuities to increase only slightly in
1997, compared with 1996. Sales of general account annuities increased in 1998,
compared with 1997, as certain investors opted for fixed crediting rates rather
than other investment alternatives available during a period of market
uncertainty, primarily in the second half of 1998.
    
 
   
During 1998 and 1997, We assumed $21.6 million and $21.1 million, respectively,
of term life insurance premiums from FKLA. Excluding the amounts assumed from
FKLA, Our total term life sales, including new and renewal premiums, net of
reinsurance ceded, amounted to $846 thousand in 1998, compared with $1.1 million
in 1997 and $565 thousand in 1996.
    
 
   
FEDERAL INCOME TAX DEVELOPMENTS
    
 
   
In early 1999, the Clinton Administration's Fiscal Year 1999 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not such proposals will be accepted, amended or
omitted in the final 1999 Budget approved by Congress. If the current Budget
proposals are accepted, BOLI contracts may no longer be tax advantaged products
and therefore less attractive to those customers who purchase them in
recognition of their favorable tax attributes. Additionally, sales of these
products during 1999 may also be negatively impacted until the likelihood of the
current proposals being enacted into law has been determined.
    
 
   
YEAR 2000 COMPLIANCE
    
 
   
Many existing computer programs were originally designed without considering the
impact of the year 2000 and currently use only two digits to identify the year
in the date field. This issue affects nearly all companies and organizations and
could cause computer applications and systems to fail or create erroneous
results for any transaction with a date of January 1, 2000, or later.
    
 
   
Many companies must undertake major projects to address the year 2000 issue.
Each company's costs and uncertainties will depend on a number of factors,
including its software and hardware, and the nature of the industry. Companies
must also coordinate with other entities with which they electronically
interact, including suppliers, customers, creditors and other financial services
institutions.
    
 
   
If a company does not successfully address its year 2000 issues, it could face
material adverse consequences in the form of lawsuits against the company, lost
business, erroneous results and substantial operating problems after January 1,
2000.
    
 
                                       39
<PAGE>   44
 
   
We have taken substantial steps over the last several years to ensure that Our
systems will be compliant for the year 2000. Such steps have included the
replacement of older systems with new systems which are already compliant. In
1996, We replaced Our investment accounting system, and, in 1997, We replaced
Our general ledger and accounts payable system. We have also ensured that new
systems developed to support new product introductions in 1997, 1998 and beyond
are already year 2000 compliant. Data processing expenses related solely to
bringing Our systems in compliance with the year 2000 amounted to $1.3 million
in 1998. We anticipate that it will cost an additional $662 thousand to bring
all remaining systems into compliance.
    
 
   
Our policy administration systems have been completely renovated to be year 2000
compliant and are currently running in a test environment. Approximately 75
percent of Our ancillary systems confirmed to be year 2000 compliant were in
production at December 31, 1998. We anticipate that all such systems will be in
production at April 30, 1999 or sooner. Testing procedures have confirmed the
performance, functionality, and integration of converted or replaced platforms,
applications, databases, utilities, and interfaces in an operational
environment. Our testing and verification for year 2000 compliance has
encompassed the following:
    
 
   
     - mainframe computing systems
    
 
   
     - mainframe hardware and systems software
    
 
   
     - PC/LAN computing systems
    
 
   
     - PC/LAN hardware and systems software
    
 
   
     - end-user computing systems
    
 
   
     - interfaces to and from third parties, and
    
 
   
     - other miscellaneous electronic non-information systems
    
 
   
We have also taken steps requiring all other entities with which We
electronically interact, including suppliers and other financial services
institutions, to attest to Us in writing that their systems are year 2000
compliant.
    
 
   
If We do not successfully address Our year 2000 issues, We could face material
adverse consequences from lawsuits, lost business, erroneous results and
substantial operating problems after January 1, 2000. Although We fully expect
to be year 2000 compliant by the close of 1999, We are currently developing
contingency plans to handle the most reasonably likely worst case scenarios.
These contingency plans are scheduled for completion in the third quarter of
1999.
    
 
   
NAIC RATIOS
    
 
   
The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. Currently, twelve IRIS ratios are
calculated. The primary purpose of the ratios is to provide an "early warning"
of any negative developments. The NAIC reports a company's ratios to state
regulators who may then contact the company if three or more ratios fall outside
the NAIC's "usual ranges".
    
 
   
Based on statutory financial data as of December 31, 1998, We had two ratios
outside the usual ranges, the change in reserving ratio and the change in
premium ratio. Our change in reserving ratio reflected the level of
interest-sensitive life surrenders and withdrawals during 1998, as well as the
effects of a reinsurance
    
 
                                       40
<PAGE>   45
 
   
agreement with FKLA. Our change in premium ratio reflected the $1.2 billion
decrease in BOLI premiums received during 1998, compared with 1997. Other than
certain states requesting quarterly financial reporting and/or explanations of
the underlying causes for certain ratios, no state regulators have taken any
action due to Our IRIS ratios for 1998 or earlier years.
    
 
   
RISK-BASED CAPITAL, ASSET ADEQUACY AND CODIFICATION
    
 
   
Under Illinois' asset adequacy and risk-based capital rules, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
assets supporting reserves are adequate to cover liabilities under a variety of
economic scenarios. The focus of risk-based 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. We have capital
levels substantially exceeding any that would mandate action under the
risk-based capital rules and is in compliance with applicable asset adequacy
rules.
    
 
   
In March 1998, the NAIC approved the codification of statutory accounting
principles. Codification is effective January 1, 2001; however, Our domiciliary
state of Illinois has yet to adopt codification. In any event, We have not
quantified the impact that codification will have on Our statutory financial
position or results of operations.
    
 
   
RESERVES AND REINSURANCE
    
 
   
The following table provides a breakdown of Our reserves for future policy
benefits by product type (in millions):
    
 
   
<TABLE>
<CAPTION>
                                                              DECEMBER 31   DECEMBER 31
                                                                 1998          1997
                                                              -----------   -----------
<S>                                                           <C>           <C>
General account annuities...................................    $2,864        $3,137
Interest-sensitive life insurance and other.................       688           709
Term life reserves..........................................         9            10
Ceded future policy benefits................................       345           383
                                                                ------        ------
          Total.............................................    $3,906        $4,239
                                                                ======        ======
</TABLE>
    
 
   
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where We insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with our affiliate Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"). FLA shares directors,
management, operations and employees with FKLA pursuant to an administrative and
management services agreement. FLA produces policies not produced by FKLA or
KILICO as well as other policies similar to certain FKLA policies. At December
31, 1998 and 1997, Our reinsurance reserve credit from FLA related to these
coinsurance transactions totaled approximately $344.8 million and $382.6
million, respectively. Utilizing FKLA's employees, We are the servicing company
for this coinsured business and We are reimbursed by FLA for the related
servicing expenses.
    
 
   
During December 1997, We entered into a funds withheld reinsurance agreement
with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC Life"),
formerly EPICENTRE Reinsurance (Bermuda) Limited. Under the terms of this
agreement, We ceded, on a yearly renewable term basis, ninety percent of the net
amount at risk (death benefit payable to the insured less the insured's separate
account cash surrender value) related to variable BOLI, which is held in Our
separate accounts. During 1998, We
    
 
                                       41
<PAGE>   46
 
   
modified the reinsurance agreement to increase the reinsurance from ninety
percent to one hundred percent. During 1998 and 1997, We issued $6.9 billion
(face amount) and $59.3 billion (face amount), respectively, of new BOLI
business and ceded $11.1 billion (face amount) and $51.5 billion (face amount),
respectively, to ZC Life under the terms of the treaty. During 1998 and 1997, We
also ceded $175.5 million and $24.3 million, respectively, of separate account
fees (cost of insurance charges) to ZC Life. We have also withheld approximately
$170.9 million and $23.4 million of the funds due to ZC Life under the terms of
the reinsurance agreement as a component of benefits and funds payable in the
accompanying consolidated balance sheets in this Prospectus as of December 31,
1998 and 1997, respectively.
    
 
   
We have a large and growing funds withheld account ("FWA") supporting reserve
credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA is now marked-to-market based upon the
Total Return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, We recorded a $2.5 million increase to the FWA
related to this mark-to-market. In November 1998, to properly match revenue and
expenses, We placed assets supporting the FWA in a segmented portion of its
General Account. This portfolio is classified as "trading" under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, We recorded a realized capital gain of $2.8 million upon transfer
of these assets from "available for sale" to the trading portfolio as required
by FAS 115. In addition, We recorded realized capital losses of $151 thousand
related to the changes in fair value of this portfolio during 1998. The fair
value of this portfolio was $101.8 million at December 31, 1998, and the
amortized cost was $99.1 million. We periodically purchase assets into this
segmented portfolio to support changes in the FWA.
    
 
   
During 1996, We assumed on a yearly renewable term basis approximately $14.4
billion (face amount) of term life insurance from FKLA. As a result of this
transaction, We also recorded reserves in 1998 and 1997 of approximately $8.5
million and $7.9 million, respectively.
    
 
   
COMPETITION
    
 
   
We are in a highly competitive business. We compete with a large number of other
stock and mutual life insurance companies, many of which are larger financially,
although none is truly dominant in the industry. With Our emphasis on annuity
products, We also compete for savings dollars with securities brokerage and
investment advisory firms as well as other institutions that manage assets,
produce financial products or market other types of investment products.
    
 
   
Our principal methods of competition continue to be innovative products, often
designed for selected distribution channels and economic conditions, as well as
appropriate product pricing, careful underwriting, expense control and the
quality of services provided to policyholders and agents.
    
 
   
To address Our competition, We have adopted certain business strategies. These
include:
    
 
   
     - systematic review of investment risk and its capital position
    
 
   
     - continued focus on existing and new variable annuity and variable life
       insurance products
    
 
   
     - distribution through diversified channels, and
    
 
   
     - ongoing efforts to continue as a low-cost provider of insurance products
       and high-quality services to agents and policyholders through the use of
       technology
    
 
                                       42
<PAGE>   47
 
   
EMPLOYEES
    
 
   
At December 31, 1998, We used the services of approximately 861 employees of
FKLA, which are also shared with FLA and Zurich Life Insurance Company of
America ("ZLICA"). On January 5, 1996, KILICO, FKLA, FLA and ZLICA began to
operate under the trade name Zurich Kemper Life. On July 1, 1996, Kemper
acquired 100 percent of the issued and outstanding common stock of ZLICA from
Zurich.
    
 
   
REGULATION
    
 
   
We are generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where We are licensed to do
business. These departments enforce laws and regulations designed to assure that
insurance companies maintain adequate capital and surplus, manage investments
according to prescribed character, standards and limitations and comply with a
variety of operational standards. The departments also make periodic
examinations of individual companies and review annual and other reports on the
financial condition of each company operating within their respective
jurisdictions. Regulations, which often vary from state to state, cover most
aspects of the life insurance business, including market practices, policy forms
and accounting and financial reporting procedures.
    
 
   
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
    
 
   
In addition, certain of Our variable life insurance and annuity products, and
the related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").
    
 
   
We believe We are in compliance in all material respects with all applicable
regulations.
    
 
   
INVESTMENTS
    
 
   
A changing marketplace has affected the life insurance industry. To accommodate
customers' increased preference for safety over higher yields, We have
systematically reduced Our investment risk and strengthened Our capital
position.
    
 
   
Our cash flow is carefully monitored and its investment program is regularly and
systematically planned to provide funds to meet all obligations and to optimize
investment return. For securities, portfolio management is handled by an
affiliated company, Scudder Kemper Investments, Inc. ("SKI") and its
subsidiaries and affiliates. Our real estate-related investments are handled by
a majority-owned Kemper real estate subsidiary. Investment policy is directed by
Our board of directors. Our investment strategies take into account the nature
of each annuity and life insurance product, the respective crediting rates and
the estimated future policy benefit maturities.
    
 
   
FORWARD-LOOKING STATEMENTS
    
 
   
All statements, trend analyses and other information contained in this
Prospectus and elsewhere (such as in Our filings with the SEC, press releases,
presentations by KILICO or its management or oral statements) about markets for
Our products and trends in Our operations or financial results, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend," and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to known and unknown risks, uncertainties
and other
    
 
                                       43
<PAGE>   48
 
   
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. These factors include, among
other things:
    
 
   
   (i) general economic conditions and other factors, including prevailing
       interest rate levels and stock market performance, which may affect Our
       ability to sell Our products, the market value of Our investments and the
       lapse rate and profitability of Our contracts
    
 
   
  (ii) Our ability to achieve anticipated levels of operational efficiencies
       through certain cost-saving initiatives
    
 
   
 (iii) customer response to new products, distribution channels and marketing
       initiatives
    
 
   
  (iv) mortality, morbidity, and other factors which may affect the
       profitability of Our insurance products
    
 
   
  (v)  changes in the federal income tax laws and regulations which may affect 
       the relative tax advantages of some of Our products
    
 
   
  (vi) increasing competition which could affect the sale of Our products
    
 
   
 (vii) regulatory changes or actions, including those relating to regulation of
       financial services affecting (among other things) bank sales and
       underwriting of insurance products, regulations of the sale and
       underwriting and pricing of insurance products, and
    
 
   
(viii) the risk factors or uncertainties listed from time to time in Our filings
       with the SEC
    
 
   
                                   PROPERTIES
    
 
   
We primarily share 84,270 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois. We also share 74,000 sq. ft. of office space leased by FKLA and
ZLICA from Zurich American Insurance Company, an affiliate, located in
Schaumburg, Illinois.
    
 
   
                               LEGAL PROCEEDINGS
    
 
   
KILICO has been named as defendant in certain lawsuits incidental to Our
insurance business. Based upon the advice of legal counsel, Our management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
    
 
                                       44
<PAGE>   49
 
   
                            SELECTED FINANCIAL DATA
    
 
   
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1998, and for the opening balance sheet as of the
acquisition date, January 4, 1996. This information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in this Prospectus. All amounts are shown in millions.
    
 
   
<TABLE>
<CAPTION>
                                                                                             PREACQUISITION
                                                                                         ----------------------
                                                                                              DECEMBER 31
                               DECEMBER 31    DECEMBER 31    DECEMBER 31    JANUARY 4    ----------------------
                                  1998           1997           1996         1996(2)       1995          1994
                               -----------    -----------    -----------    ---------    --------      --------
<S>                            <C>            <C>            <C>            <C>          <C>           <C>
TOTAL REVENUE...............    $   419.7      $   425.5      $  356.2      $  --        $   68.1(1)   $  330.5
                                =========      =========      ========      ========     ========      ========
NET INCOME EXCLUDING
  REALIZED INVESTMENT
  RESULTS...................    $    31.4      $    31.9      $   25.6      $  --        $   74.2      $   61.9
                                =========      =========      ========      ========     ========      ========
NET INCOME (LOSS)...........    $    65.1      $    38.7      $   34.4      $  --        $ (133.0)(1)  $   26.4
                                =========      =========      ========      ========     ========      ========
FINANCIAL SUMMARY
Total separate account
  assets....................    $ 7,099.2      $ 5,122.0      $2,127.2      $1,761.1     $1,761.1      $1,508.0
                                =========      =========      ========      ========     ========      ========
Total assets................    $12,239.7      $10,589.7      $7,717.9      $7,682.7     $7,581.7      $7,537.1
                                =========      =========      ========      ========     ========      ========
Future policy benefits......    $ 3,561.6      $ 3,856.9      $4,256.5      $4,585.1     $4,573.2      $4,843.7
                                =========      =========      ========      ========     ========      ========
Stockholder's equity........    $   853.9      $   865.6      $  751.0      $  745.6     $  605.9      $  434.0
                                =========      =========      ========      ========     ========      ========
</TABLE>
    
 
---------------
   
(1) Real estate-related investment losses adversely impacted total revenue and
    net income (loss) for 1995. These losses reflect a change in KILICO's
    strategy with respect to its real estate-related investments resulting from
    the January 4, 1996 acquisition of Kemper by the Zurich-led investor group.
    
 
   
(2) The consolidated information presented as of the acquisition on January 4,
    1996 is accounted for using the purchase method of accounting.
    
 
                                       45
<PAGE>   50
 
   
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
    
   
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
 
   
As discussed in the note captioned "Summary of Significant Accounting Policies"
in the notes to the consolidated financial statements, Kemper, and therefore
KILICO, were acquired on January 4, 1996, by an investor group led by Zurich. In
connection with the acquisition, KILICO's assets and liabilities were marked to
their respective fair values as of the acquisition date in conformity with the
purchase accounting method required under generally accepted accounting
principles.
    
 
   
RESULTS OF OPERATIONS
    
 
   
KILICO recorded net income of $65.1 million in 1998, compared with net income of
$38.7 million in 1997 and $34.4 million in 1996. The increase in net income in
1998, compared with 1997, was due to a significant increase in net realized
capital gains and a decrease in goodwill amortization, offset by a slight
decline in operating earnings before amortization of goodwill.
    
 
   
The following table reflects the components of net income:
    
 
   
                 NET INCOME
    
   
                 (in millions)
    
 
   
<TABLE>
<CAPTION>
                                  YEAR ENDED DECEMBER 31
                                 ------------------------
                                  1998     1997     1996
                                 ------   ------   ------
<S>                              <C>      <C>      <C>
Operating earnings before
  amortization of goodwill.....  $ 44.1   $ 47.2   $ 35.8
Amortization of goodwill.......   (12.7)   (15.3)   (10.2)
Net realized investment
  gains........................    33.7      6.8      8.8
                                 ------   ------   ------
          Net income...........  $ 65.1   $ 38.7   $ 34.4
                                 ======   ======   ======
</TABLE>
    
 
   
The following table reflects the major components of realized investment results
included in net income above.
    
 
   
                 REALIZED INVESTMENT RESULTS, AFTER TAX
    
   
                 (in millions)
    
 
   
<TABLE>
<CAPTION>
                                  YEAR ENDED DECEMBER 31
                                 ------------------------
                                  1998     1997     1996
                                 ------   ------   ------
<S>                              <C>      <C>      <C>
Real estate-related gains......  $ 26.9   $ 12.8   $ 11.4
Fixed maturity write-downs.....    (2.0)    (2.8)     (.9)
Other gains (losses), net......     8.8     (3.2)    (1.7)
                                 ------   ------   ------
          Total................  $ 33.7   $  6.8   $  8.8
                                 ======   ======   ======
</TABLE>
    
 
   
The real estate-related gains over the last three years, reflect Our adoption of
Zurich's strategy for disposition of real estate-related investments. This
strategy to reduce exposure to real estate-related investments, as well as
improving real estate market conditions in most areas of the country, generated
the increasing real estate-related gains during the last three years. Fixed
maturity write-downs in 1998 and 1997 primarily reflect other-than-temporary
declines in value of certain U.S. dollar denominated fixed maturity investments
which have significant exposure to countries in Southeast Asia, as well as other
U.S. dollar
    
 
                                       46
<PAGE>   51
 
   
denominated securities that had other-than-temporary declines in value in 1998.
Other realized investment gains and losses for 1998, 1997 and 1996 relate
primarily to the sale of fixed maturity investments, as well as gains from
equity securities in 1998. The losses generated in 1997 and 1996 arose primarily
from the sale of fixed maturity investments, consisting of lower yielding U.S.
Treasury bonds, collateralized mortgage obligations and corporate bonds, related
to ongoing repositionings of Our fixed maturity investment portfolio. The
proceeds from the repositionings, together with cash and short-term investments,
were reinvested into higher yielding corporate bonds and asset-backed securities
in 1997 and 1996.
    
 
   
Operating earnings before the amortization of goodwill decreased to $44.1
million in 1998, compared with $47.2 million in 1997. Operating earnings
decreased in 1998 before the amortization of goodwill, compared with 1997,
primarily due to:
    
 
   
     - a decrease in separate account fees and charges
    
 
   
     - an increase in commissions and operating expenses
    
 
   
     - an increase in the amortization of insurance acquisition costs, offset by
    
 
   
     - a decrease in taxes, licenses and fees
    
 
   
     - an increase in the deferral of insurance acquisition costs, and
    
 
   
     - a decrease in the amortization of the value of business acquired
    
 
   
Operating earnings before the amortization of goodwill increased to $47.2
million in 1997, compared with $35.8 million in 1996, primarily due to:
    
 
   
     - an increase in spread revenue (investment income earned less interest
       credited)
    
 
   
     - an increase in separate account fees and charges
    
 
   
     - an increase in premium income
    
 
   
     - an increase in the deferral of insurance acquisition costs, offset by
    
 
   
     - an increase in claims incurred and other policyholder benefits
    
 
   
     - an increase in taxes, licenses and fees, and
    
 
   
     - an increase in commissions and operating expenses
    
 
   
Investment income and interest credited declined in 1998, compared with 1997 and
1996, as a result of a decrease in both total invested assets and liabilities
for future policy benefits to policyholders. Such decreases were the result of
surrender and withdrawal activity over the last three years. Investment income
also decreased in 1998, compared with 1997, due to reinvestment of 1998 fixed
maturity sales proceeds at lower yields than in 1997 and higher amortization of
bond premium. This amortization was due to an increase in certain collateralized
mortgage obligation prepayments due to the low interest rate environment in
1998.
    
 
   
Investment income was also reduced over the last three years reflecting purchase
accounting adjustments related to the amortization of premiums on fixed maturity
investments. Under purchase accounting, the fair value of KILICO's fixed
maturity investments as of January 4, 1996 became KILICO's new cost basis in the
investments. The difference between the new cost basis and original par is then
amortized against investment income over the remaining effective lives of the
fixed maturity investments. As a result of the interest rate environment as of
January 4, 1996, the market value of KILICO's fixed maturity investments was
    
 
                                       47
<PAGE>   52
 
   
approximately $133.9 million greater than original par. Premium amortization
decreased investment income by approximately $14.4 million in 1998, compared
with $15.3 million in 1997 and $22.7 million in 1996.
    
 
   
Investment income was also negatively impacted during 1996 by a higher level of
cash and short-term investments held in the first quarter of 1996. The increase
in cash and short-term investments in the first quarter of 1996 was caused in
part by the cash proceeds received from bulk sales of real estate-related
investments in late December 1995.
    
 
   
Investment income was negatively impacted by dividends paid to Kemper in 1998.
Investment income was positively impacted in 1997 and 1996 from the benefits of
capital contributions to KILICO and from the above-mentioned repositionings of
Our investment portfolio.
    
 
   
The following table reflects KILICO's sales.
    
 
   
            SALES
    
   
            (in millions)
    
 
   
<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31
                                        ----------------------------
                                          1998       1997      1996
                                        --------   --------   ------
<S>                                     <C>        <C>        <C>
Annuities:
  General account.....................  $  179.9   $  145.7   $140.6
  Separate account....................     300.4      259.8    254.6
                                        --------   --------   ------
     Total annuities..................     480.3      405.5    395.2
                                        --------   --------   ------
Life Insurance:
  Separate account bank-owned variable
     universal life ("BOLI")..........   1,501.0    2,700.0     --
  Separate account variable universal
     life.............................      22.0        8.6       .2
  Term life...........................      22.4       22.2      7.8
  Interest-sensitive life.............        .2      --          .6
                                        --------   --------   ------
     Total life.......................   1,545.6    2,730.8      8.6
                                        --------   --------   ------
               Total sales............  $2,025.9   $3,136.3   $403.8
                                        ========   ========   ======
</TABLE>
    
 
   
Sales of annuity products consist of total deposits received. General account
annuity sales increased in 1998, compared with 1997, as certain investors opted
for fixed crediting rates rather than other investment alternatives available
during a period of market uncertainty, primarily in the second half of 1998. The
slight increase in 1997 general account (fixed annuity) sales, compared with
1996, reflected the low interest rate environment and the strong equity market
during 1997.
    
 
   
The increase in separate account (variable sales) in 1998, compared with 1997
and 1996, was in part due to:
    
 
   
     - the addition of new separate account investment fund options
    
 
   
     - the addition of new investment fund managers
    
 
   
     - a strong overall underlying stock and bond market, and
    
 
   
     - a new variable annuity product introduced during 1998
    
 
   
Sales of variable annuities increase administrative fees earned. In addition,
they pose minimal investment risk for KILICO, as policyholders direct their
premium to one or more subaccounts that invest in underlying investment funds
which invest in stocks and bonds. We believe that the increase in Our financial
strength
    
 
                                       48
<PAGE>   53
 
   
and performance ratings in January 1996, together with Our association with
Zurich, will continue to assist in Our future sales efforts.
    
 
   
In 1997, We introduced several non-registered variable universal life insurance
contracts, BOLI and a series of individual universal life insurance contracts.
Sales of these separate account variable products, like variable annuities, pose
minimal investment risk for KILICO as policyholders also direct their premium to
one or more subaccounts that invest in underlying investment funds which invest
in stocks and bonds. We receive premium tax and DAC tax expense loads from
certain contract holders, as well as administrative fees and cost of insurance
charges. These fees and charges compensate Us for providing life insurance
coverage to the contractholders in excess of their cash surrender values. Face
amount of new variable universal life insurance business issued amounted to $7.7
billion in 1998, compared with $59.6 billion in 1997. The decrease in face
amount issued in 1998, compared to 1997 is due to a significant portion of
renewal premiums in 1998 and higher funded policies issued in 1998, compared to
those issued in 1997.
    
 
   
In early 1999, the Clinton Administration's Fiscal Year 1999 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not such proposals will be accepted, amended or
omitted in the final 1999 Budget approved by Congress. If the current Budget
proposals are accepted, BOLI contracts may no longer be tax advantaged products
and therefore no longer attractive to those customers who purchase them because
of their favorable tax attributes. Sales of these products during 1999 may be
negatively impacted until the likelihood of the current proposals being enacted
into law has been determined.
    
 
   
In 1998 and 1997, KILICO assumed $21.6 million and $21.1 million, respectively,
of term life insurance premiums from FKLA. Excluding the amounts assumed from
FKLA, KILICO's total term life sales, including new and renewal premiums,
amounted to $846 thousand in 1998, compared with $1.1 million in 1997 and $565
thousand in 1996. The face amounts of new term business issued during 1998, 1997
and 1996 totaled approximately $276 million, $278 million and $187 million,
respectively.
    
 
   
Included in separate account fees and charges are administrative fees received
from Our separate account products of $38.3 million in 1998, compared with $31.0
million and $25.3 million in 1997 and 1996, respectively. Administrative fee
revenue increased in each of the last three years due to growth in average
separate account assets.
    
 
   
Also included in separate account fees and charges in 1998 and 1997 are cost of
insurance ("COI") charges related to variable universal life insurance,
primarily BOLI, of $167.6 million and $27.6 million, respectively. Of these COI
charges, $175.5 million and $24.3 million of such fees were ceded in 1998 and
1997, respectively, to a Zurich affiliated company, ZC Life Reinsurance Limited
("ZC Life"), formerly EPICENTER Reinsurance (Bermuda) Limited. In 1998, KILICO
ceded in excess of 100 percent of the COI charges received due to changes to the
reinsurance agreement with ZC Life. Separate account fees and charges in 1998
and 1997 also include BOLI-related premium tax expense loads of $29.1 million
and $51.1 million, respectively.
    
 
   
Other income includes surrender charge revenue of $4.0 million in 1998, compared
with $5.2 million and $5.4 million in 1997 and 1996, respectively. The decrease
in surrender charge revenue in 1998, compared with 1997, primarily reflects a
decrease in total general account and separate account policyholder surrenders
and withdrawals. The slight decrease in surrender charge revenue in 1997,
compared with 1996, reflects that 46 percent of KILICO's fixed and variable
annuity liabilities, excluding BOLI, at December 31, 1997 are subject to minimal
(5 percent or less) or no surrender charges, compared with 57 percent in 1996.
    
 
                                       49
<PAGE>   54
 
   
This decrease in surrender charge revenue in 1997 was offset somewhat by an
increase in total general account and separate account policyholder surrenders
and withdrawals.
    
 
   
            POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
    
   
            (in millions)
    
 
   
<TABLE>
<CAPTION>
                                    1998           1997           1996
                                   ------         ------         ------
<S>                                <C>            <C>            <C>
General account................    $645.5         $703.1         $652.0
Separate account...............     260.9          236.2          196.7
                                   ------         ------         ------
     Total.....................    $906.4         $939.3         $848.7
                                   ======         ======         ======
</TABLE>
    
 
   
Reflecting the current interest rate environment and other competitive market
factors, We adjust Our crediting rates on interest-sensitive products over time
in order to manage spread revenue and policyholder surrender and withdrawal
activity. We can also improve spread revenue over time by increasing investment
income. The current interest rate environment during 1997 and 1998, has
mitigated at present, competitive pressures to increase existing renewal
crediting rates.
    
 
   
General account surrenders, withdrawals and death benefits decreased $57.6
million in 1998, compared with 1997. This decrease primarily reflects a decrease
in surrenders and withdrawals due to uncertainty with alternative investment
options because of market instability during the second half of 1998.
    
 
   
Taxes, licenses and fees decreased $22.3 million in 1998 to $30.3 million,
reflecting the decrease in premium taxes on BOLI. Excluding the taxes due on
BOLI, for which We received a corresponding expense load in separate account
fees and other charges, taxes, licenses and fees amounted to $1.5 million,
compared with $1.5 million in 1997 and $2.2 million in 1996.
    
 
   
Commission expense was higher in 1998, compared with both 1997 and 1996, due to
an increase in total sales, excluding BOLI.
    
 
   
Operating expenses increased in 1998 and 1997, compared with 1996, as a result
of:
    
 
   
     - restaffing after the completion of the acquisition and for new business
       initiatives
    
 
   
     - an increase in various outside consulting fees
    
 
   
     - an increase in printing and stationary expenses for sales materials, and
    
 
   
     - an increase in data processing expenses
    
 
   
Data processing expenses increased to $12.9 million in 1998, compared with $10.8
million in 1997 and $4.1 million in 1996, primarily due to:
    
 
   
     - infrastructure improvements related to new product development
    
 
   
     - new systems implemented and put into production
    
 
   
     - system conversion projects
    
 
   
     - development of a data warehouse, and
    
 
   
     - costs related to bringing Our systems in compliance with the year 2000
    
 
                                       50
<PAGE>   55
 
   
Data processing expenses related to bringing Our systems in compliance with the
year 2000 amounted to $1.3 million in 1998. We currently anticipate that it will
cost an additional $662 thousand to bring all remaining systems in compliance.
    
 
   
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1998, compared with 1997 and 1996. The deferral of
insurance acquisition costs increased in 1998, compared with both 1997 and 1996.
This reflects an increase in commissions expense and operating expenses related
directly to the increase in production of new business.
    
 
   
Operating earnings were negatively impacted by the amortization of insurance
acquisition costs in 1998 and 1997, compared with 1996, with the most dramatic
increase occurring in 1998. The increase in amortization of insurance
acquisition costs in 1998, compared with 1997, was primarily due to the increase
in production of new business in 1998, as well as increased profits in 1998.
These increases tend to accelerate amortization. Deferred insurance acquisition
costs, and their related amortization, for policies sold prior to January 4,
1996 have been replaced under purchase accounting by the value of business
acquired. The value of business acquired reflects the present value of the right
to receive future cash flows from insurance contracts existing at the date of
acquisition. The amortization of the value of business acquired is calculated
assuming an interest rate equal to the liability or contract rate on the value
of the business acquired. Deferred insurance acquisition costs are established
on all new policies sold after January 4, 1996.
    
 
   
The amortization of the value of business acquired decreased in 1998, compared
with 1997, as a result of:
    
 
   
     - a significant increase in separate account assets, which increases
       estimated future gross profits and shifts amortization to later years
    
 
   
     - a decreasing block of business previously acquired, resulting in less
       amortization as gross profits on this business decrease, offset by
    
 
   
     - a significant increase in realized capital gains which tend to accelerate
       the amortization of the value of business acquired as the gains tend to
       decrease Our projected future estimated gross profits
    
 
   
The difference between the cost of acquiring KILICO and the net fair value of
KILICO's assets and liabilities as of January 4, 1996 was recorded as goodwill.
During 1996, We began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, We changed Our amortization period to
twenty years in order to conform to Zurich's accounting practices and policies.
As a result of the change in amortization periods, We recorded an increase in
amortization expense of $5.1 million during 1997.
    
 
   
INVESTMENTS
    
 
   
Our principal investment strategy is to maintain a balanced, well-diversified
portfolio supporting the insurance contracts written. We make shifts in Our
investment portfolio depending on, among other factors:
    
 
   
     - its evaluation of risk and return in various markets
    
 
   
     - consistency with Our business strategy and investment guidelines approved
       by the board of directors
    
 
   
     - the interest rate environment
    
 
   
     - liability durations, and
    
 
   
     - changes in market and business conditions
    
 
                                       51
<PAGE>   56
 
   
INVESTED ASSETS AND CASH
    
   
(in millions)
    
 
   
<TABLE>
<CAPTION>
                                                           DECEMBER 31          DECEMBER 31
                                                              1998                 1997
                                                         ---------------      ---------------
<S>                                                      <C>       <C>        <C>       <C>
Cash and short-term investments........................  $   72      1.7%     $  260      5.8%
Fixed maturities:
  Investment-grade:
     NAIC(1) Class 1...................................   2,663     63.7       3,004     67.1
     NAIC(1) Class 2...................................     724     17.3         651     14.5
  Below investment grade:
     Performing........................................      96      2.3          14       .3
     Nonperforming.....................................    --       --          --       --
Trading account securities.............................     102      2.4        --       --
Joint venture mortgage loans...........................      66      1.6          73      1.6
Third-party mortgage loans.............................      76      1.8         103      2.3
Other real estate-related investments..................      22       .5          44      1.0
Policy loans...........................................     271      6.5         282      6.3
Equity securities......................................      67      1.6          25       .6
Other..................................................      24       .6          21       .5
                                                         ------    -----      ------    -----
          Total(2).....................................  $4,183    100.0%     $4,477    100.0%
                                                         ======    =====      ======    =====
</TABLE>
    
 
---------------
   
(1) National Association of Insurance Commissioners ("NAIC").
    
   
   -- Class 1 = A- and above
    
   
    -- Class 2 = BBB- through BBB+
    
 
   
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
    the notes to the consolidated financial statements.
    
 
   
FIXED MATURITIES
    
 
   
We are carrying Our fixed maturity investment portfolio, which We consider
available for sale, at estimated fair value. The aggregate unrealized
appreciation or depreciation is recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense. The aggregate
unrealized appreciation (depreciation) on fixed maturities at December 31, 1998
and 1997 was $61.3 million and $24.6 million, respectively. Fair values are
sensitive to movements in interest rates and other economic developments and can
be expected to fluctuate, at times significantly, from period to period.
    
 
   
At December 31, 1998, investment-grade fixed maturities and cash and short-term
investments accounted for 82.7 percent of Our invested assets and cash, compared
with 87.4 percent at December 31, 1997. Approximately 53.4 percent of Our NAIC
Class 1 bonds were rated AAA or equivalent at year-end 1998, compared with 54.0
percent at December 31, 1997.
    
 
   
Approximately 28.0 percent of Our investment-grade fixed maturities at December
31, 1998 were mortgage-backed securities, down from 35.1 percent at December 31,
1997, due to sales and paydowns during 1998. These investments consist primarily
of marketable mortgage pass-through securities issued by the Government National
Mortgage Association, the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation and other investment-grade securities
collateralized by mortgage pass-through securities issued by these entities. We
have not made any investments in interest-only or other
    
 
                                       52
<PAGE>   57
 
   
similarly volatile tranches of mortgage-backed securities. Our mortgage-backed
investments are generally of AAA credit quality, and the markets for these
investments have been and are expected to remain liquid. We plan to continue to
reduce Our holding of these investments over time.
    
 
   
As a result of the previously discussed repositionings of Our fixed maturity
portfolio, approximately 15.4 percent and 10.8 percent of Our investment-grade
fixed maturities at December 31, 1998 and 1997, respectively, consisted of
corporate asset-backed securities. The majority of Our investments in
asset-backed securities were backed by home equity loans (21.9%), auto loans
(8.2%), manufactured housing loans (14.8%), equipment loans (5.2%), and
commercial mortgage backed securities ("CMBs") (22.1%).
    
 
   
Future investment income from mortgage-backed securities and other asset-backed
securities may be affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments. As a result of
purchase accounting adjustments to fixed maturities, most of Our mortgage-backed
securities are carried at a premium over par. Prepayment activity resulting from
a decline in interest rates on such securities purchased at a premium would
accelerate the amortization of the premiums. Accelerated amortization would
result in reductions of investment income related to such securities.
    
 
   
At December 31, 1998 and 1997 We had unamortized premiums and discounts related
to mortgage-backed and asset-backed securities as follows (in millions):
    
 
   
<TABLE>
<CAPTION>
                                                               DECEMBER 31
                                                              -------------
                                                              1998    1997
                                                              -----   -----
<S>                                                           <C>     <C>
Unamortized premiums........................................  $15.8   $19.6
                                                              =====   =====
Unamortized discounts.......................................  $ 4.6   $ 5.2
                                                              =====   =====
</TABLE>
    
 
   
Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method. This method
considers the estimated timing and amount of prepayments of the underlying loans
and is adjusted to reflect differences between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of these securities change as a result of
changes in prepayment rates, the adjustment is also included in net investment
income.
    
 
                                       53
<PAGE>   58
 
   
The table below provides information about Our mortgage-backed and asset-backed
securities that are sensitive to changes in interest rates. The expected
maturity dates have been calculated on a security by security basis using
prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
    
 
   
<TABLE>
<CAPTION>
                         CARRYING                                                                          FAIR VALUE
                         VALUE AT                     EXPECTED MATURITY DATE                                   AT
                       DECEMBER 31,   ------------------------------------------------------              DECEMBER 31,
    (IN MILLIONS)          1998        1999     2000     2001    2002     2003    THEREAFTER    TOTAL         1998
    -------------      ------------    ----     ----     ----    ----     ----    ----------    -----     ------------
<S>                    <C>            <C>      <C>      <C>      <C>     <C>      <C>          <C>        <C>
Fixed Maturities:
  Mortgage-backed
    bonds............    $  946.7     $137.2   $ 85.7   $ 48.3   $47.7   $149.6     $478.2     $  946.7     $  946.7
    Average yield....        6.45%      6.46%    6.42%    6.43%   6.42%    6.42%      6.42%        6.45%        6.45%
  Asset-backed
    bonds............    $  407.4     $ 17.9   $ 36.1   $ 49.8   $36.1   $ 31.9     $235.6     $  407.4     $  407.4
    Average yield....        6.67%      6.73%    6.75%    6.82%   6.90%    6.90%      6.95%        6.67%        6.67%
  CMBs...............    $  115.5     $  1.3   $  1.2   $  1.4   $ 1.5   $ 12.3     $ 97.8     $  115.5     $  115.5
    Average yield....        6.25%      6.28%    6.28%    6.28%   6.28%    6.28%      6.28%        6.25%        6.25%
                         --------                                                              --------     --------
                         $1,469.6                                                              $1,469.6     $1,469.6
                         ========                                                              ========     ========
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                         CARRYING                                                                         FAIR VALUE
                         VALUE AT                    EXPECTED MATURITY DATE                                   AT
                       DECEMBER 31,   -----------------------------------------------------              DECEMBER 31,
    (IN MILLIONS)          1997        1998     1999     2000    2001    2002    THEREAFTER    TOTAL         1997
    -------------      ------------    ----     ----     ----    ----    ----    ----------    -----     ------------
<S>                    <C>            <C>      <C>      <C>      <C>     <C>     <C>          <C>        <C>
Fixed Maturities:
  Mortgage-backed
    bonds............    $1,283.6     $219.1   $232.5   $145.1   $92.2   $64.5     $530.2     $1,283.6     $1,283.6
    Average yield....        6.58%      6.60%    6.61%    6.64%   6.64%   6.63%      6.67%        6.58%        6.58%
  Asset-backed
    bonds............    $  353.0     $ 18.9   $ 16.9   $ 30.8   $35.5   $47.2     $203.7     $  353.0     $  353.0
    Average yield....        6.81%      6.85%    7.04%    7.05%   7.15%   7.13%      7.20%        6.81%        6.81%
  CMBs...............    $   42.2     $  0.3   $  0.4   $  0.4   $ 0.4   $ 8.0     $ 32.7     $   42.2     $   42.2
    Average yield....        6.64%      6.64%    6.64%    6.64%   6.64%   6.63%      6.63%        6.64%        6.64%
                         --------                                                             --------     --------
                         $1,678.8                                                             $1,678.8     $1,678.8
                         ========                                                             ========     ========
</TABLE>
    
 
   
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1998, is 4.0 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately .65
of a year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.45 years.
    
 
   
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1997, was 3.8 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately 1.0
year, while a 200 basis point decrease in interest rates would have decreased
the weighted average maturity by approximately 1.3 years.
    
 
   
As of December 31, 1998, We had $29.9 million of U.S. dollar denominated fixed
maturity investments, after write-downs for other-than-temporary declines in
value, which have significant exposure to countries in Southeast Asia.
Approximately $3.5 million of these securities were from Korea, $17.6 million
were from Hong Kong, China, $2.9 million were from South Korea and the remainder
were from a United Kingdom bank with most of its loans issued to countries in
Southeast Asia. Write-downs on these securities, which were considered to be
other-than-temporary, as of December 31, 1998 and 1997 amounted to $1.1 million
    
 
                                       54
<PAGE>   59
 
   
and $3.1 million, respectively. There can be no assurance that the current
estimate for other-than-temporary declines in value for such securities will
prove accurate over time due to changing economic conditions in Southeast Asia.
    
 
   
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 40 issuers at December 31, 1998, totaled 2.3 percent
of cash and invested assets at December 31, 1998 and .3 percent at December 31,
1997. 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. Our strategy of limiting
exposure to below investment-grade securities takes into account the more
conservative nature of today's consumer and the resulting demand for
higher-quality investments in the life insurance and annuity marketplace.
    
 
   
REAL ESTATE-RELATED INVESTMENTS
    
 
   
The $164.4 million real estate-related portfolio We hold, consists of joint
venture and third-party mortgage loans and other real estate-related
investments. The real estate-related portfolio constituted 3.9 percent of cash
and invested assets at December 31, 1998, compared with $220.0 million, or 4.9
percent, at December 31, 1997. The decrease in real estate-related investments
during 1998 was primarily due to asset sales and a net increase of $16.1 million
in real estate-related reserves during 1998.
    
 
   
As reflected in the "Real estate portfolio" table below, We have continued to
fund both existing projects and legal commitments. The future legal commitments
were $64.4 million at December 31, 1998. This amount represented a net decrease
of $10.9 million since December 31, 1997, primarily due to sales in 1998. As of
December 31, 1998, We expect to fund approximately $.2 million of these legal
commitments, along with providing capital to existing projects. 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. We do not currently expect to fund these
commitments. The total legal commitments, along with estimated working capital
requirements, are considered in Our evaluation of reserves and write-downs.
    
 
   
Excluding the $1.2 million of net equity investments in joint ventures, Our real
estate loans totaled $163.2 million at December 31, 1998, after reserves and
write-downs. Of this amount, $131.3 million are on accrual status with a
weighted average interest rate of approximately 8.79 percent. Of these accrual
loans:
    
 
   
     - 17.0 percent have terms requiring current periodic payments of their full
       contractual interest
    
 
   
     - 46.1 percent require only partial payments or payments to the extent of
       borrowers' cash flow, and
    
 
   
     - 36.9 percent defer all interest to maturity
    
 
                                       55
<PAGE>   60
 
   
The equity investments in real estate at December 31, 1998 consisted of Our
other equity investments in joint ventures. These equity investments include Our
share of periodic operating results. As an equity owner or affiliate of an
equity owner, We have the ability to fund, and historically have elected to
fund, operating requirements of certain joint ventures.
    
 
   
REAL ESTATE PORTFOLIO
    
   
(in millions)
    
 
   
<TABLE>
<CAPTION>
                                                                 OTHER REAL ESTATE-RELATED
                                          MORTGAGE LOANS                INVESTMENTS
                                         ----------------   ------------------------------------
                                          JOINT    THIRD-    OTHER     REAL ESTATE     EQUITY
                                         VENTURE   PARTY    LOANS(2)      OWNED      INVESTMENTS   TOTAL
                                         -------   ------   --------   -----------   -----------   ------
<S>                                      <C>       <C>      <C>        <C>           <C>           <C>
Balance at December 31, 1997...........  $ 72.7    $103.0    $ 21.1       $ 4.0        $ 19.2      $220.0 (1)
Additions (deductions):
Fundings...............................    13.1      --       --             .2         --           13.3
Interest added to principal............     6.3       2.8     --          --            --            9.1
Sales/paydowns/distributions...........   (11.8)    (30.1)      (.3)       (6.6)        (27.0)      (75.8)
Operating gain.........................    --        --       --          --               .2          .2
Transfers..............................    --        --       --            (.7)        --            (.7)
Net realized investments gains
  (losses).............................    (3.0)     32.4        .4         3.1           8.5        41.4 (4)
Other transactions, net................   (11.5)    (31.6)      (.3)         --            .3       (43.1)(4)
                                         ------    ------    ------       -----        ------      ------
Balance at December 31, 1998...........  $ 65.8    $ 76.5    $ 20.9       $   0        $  1.2      $164.4 (3)
                                         ======    ======    ======       =====        ======      ======
</TABLE>
    
 
---------------
   
(1) Net of $9.2 million reserve and write-downs. Excludes $9.5 million of real
     estate-related accrued interest.
    
 
   
(2) The other real estate loans were notes receivable evidencing financing,
    primarily to joint ventures. These loans were issued by KILICO generally to
    provide financing for Kemper's or KILICO's joint ventures for various
    purposes.
    
 
   
(3) Net of $25.3 million reserve and write-downs. Excludes $8.7 million of real
     estate-related accrued interest.
    
 
   
(4) Included in this amount is $37.0 million of contingent interest payments
     related to a 1995 real estate sale. These payments were recorded as
     realized investment gains and then deducted from other transactions because
     they did not affect the carrying value.
    
 
   
REAL ESTATE CONCENTRATIONS AND OUTLOOK
    
 
   
Our real estate portfolio is distributed by geographic location and property
type. However, We have concentration exposures in certain states and in certain
types of properties. In addition to these exposures, We also have exposures to
certain real estate developers and partnerships.
    
 
   
As a result of Our ongoing strategy to reduce Our exposure to real
estate-related investments, as of December 31, 1998, We had three remaining
properties which account for approximately 87.2 percent of Our $164.4 million
real estate-related portfolio.
    
 
   
The largest of these investments at December 31, 1998 amounted to $64.5 million
and consisted of second mortgages on nine hotel properties and two office
buildings. Patrick M. Nesbitt or his affiliates, a third-party real estate
developer, have ownership interests in these properties. These hotels and office
buildings are
    
 
                                       56
<PAGE>   61
 
   
geographically dispersed and the current market values of the underlying
properties substantially exceed the balances due on Our mortgages. These loans
are on accrual status.
    
 
   
Our loans to a master limited partnership (the "MLP") between subsidiaries of
Kemper and subsidiaries of Lumbermens, amounted to $51.6 million at December 31,
1998. The MLP's underlying investment primarily consists of a water development
project located in California's Sacramento River Valley. This project is
currently in the final stages of a permit process with various Federal and
California State agencies which will determine the long-term economic viability
of the project. Loans to the MLP are on accrual status.
    
 
   
The remaining significant real estate-related investment amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, We have placed these real estate-related investments on nonaccrual
status as of December 31, 1996. We are currently pursuing the zoning of all
remaining unzoned properties, as well as pursuing steps to sell all remaining
zoned properties. However, due to the state of Hawaii's economy, which has
lagged behind the economic expansion of most of the rest of the United States,
We anticipate that it could be several additional years until We completely
dispose of all investments in Hawaii.
    
 
   
We evaluate Our real estate-related investments (including accrued interest)
using an estimate of the investments observable market price, net of estimated
selling costs. Because Our process includes estimates involving changing
economic conditions and other factors, there can be no assurance that current
estimates will prove accurate over time. Our real estate-related investments are
expected to continue to decline further through future sales. Our net income
could be materially reduced in future periods if:
    
 
   
     - real estate market conditions worsen in areas where Our portfolio is
       located
    
 
   
     - Kemper's and KILICO's plans with respect to certain projects change, or
    
 
   
     - necessary construction or zoning permits are not obtained
    
 
   
The following table is a summary of Our troubled real estate-related
investments:
    
 
   
            TROUBLED REAL ESTATE-RELATED INVESTMENTS
    
   
            (BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
    
   
            (in millions)
    
 
   
<TABLE>
<CAPTION>
                                        DECEMBER 31   DECEMBER 31
                                           1998          1997
                                        -----------   -----------
<S>                                     <C>           <C>
Potential problem loans(1)............     $--           $--
Past due loans(2).....................      --            --
Nonaccrual loans (primarily Hawaiian
  properties)(3)......................      37.4          47.4
Real estate owned.....................      --             4.0
                                           -----         -----
          Total.......................     $37.4         $51.4
                                           =====         =====
</TABLE>
    
 
---------------
   
(1) These are real estate-related investments where KILICO, based on known
    information, has serious doubts about the borrowers' abilities to comply
    with present repayment terms and which We anticipate may go into nonaccrual,
    past due or restructured status.
    
 
   
(2) Interest more than 90 days past due but not on nonaccrual status.
    
 
                                       57
<PAGE>   62
 
   
(3) We do not accrue interest on real estate-related investments when We judge
    that the likelihood of interest collection is doubtful. Loans on nonaccrual
    status after reserves and write-downs amounted to $31.8 million and $41.8
    million at December 31, 1998 and December 31, 1997, respectively.
    
 
   
NET INVESTMENT INCOME
    
 
   
Our pre-tax net investment income totaled $273.5 million in 1998, compared with
$296.2 million in 1997 and $299.7 million in 1996. This includes Our share of
the operating losses from equity investments in real estate consisting of other
income less depreciation, interest and other expenses. Such operating results
exclude interest expense on loans which are on nonaccrual status. As previously
discussed, Our net investment income in 1998 and 1997, compared with 1996, has
been negatively impacted by purchase accounting adjustments.
    
 
   
Our total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
    
 
   
            FOREGONE INVESTMENT INCOME
    
   
            (dollars in millions)
    
 
   
<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31
                                          ------------------------------
                                          1998         1997         1996
                                          ----         ----         ----
<S>                                       <C>          <C>          <C>
Fixed maturities......................    $ .3         $ .5         $ .7
Real estate-related investments.......     3.2          3.9           .5
                                          ----         ----         ----
       Total..........................    $3.5         $4.4         $1.2
                                          ====         ====         ====
Basis points..........................       8           10            3
                                          ====         ====         ====
</TABLE>
    
 
   
Foregone investment income from the nonaccrual of real estate-related
investments is net of Our share of interest expense on these loans excluded from
Our share of joint venture operating results. Any increase in nonperforming
securities, and either worsening or stagnant real estate conditions, would
increase the expected adverse effect on Our future investment income and
realized investment results.
    
 
   
REALIZED INVESTMENT RESULTS
    
 
   
Net income reflects after-tax realized investment gains of $33.7 million, $6.8
million and $8.8 million in 1998, 1997 and 1996, respectively. Included in the
after-tax realized investment gains are trading account security gains of $1.7
million in 1998. As previously discussed, We segregated a portion of Our General
Account investment portfolio in 1998 into a "trading" account under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
    
 
   
Unrealized gains and losses on fixed maturity investments which are available
for sale are not reflected in KILICO's net income. These changes in unrealized
value are recorded as a component of accumulated other comprehensive income, net
of any applicable income taxes. If and to the extent a fixed maturity investment
suffers an other-than-temporary decline in value, however, the security is
written down to net realizable value, and the write-down adversely impacts net
income.
    
 
                                       58
<PAGE>   63
 
   
We regularly monitor Our investment portfolio and as part of this process review
Our assets for possible impairments of carrying value. Because the review
process includes estimates involving changing economic conditions and other
factors, there can be no assurance that current estimates will prove accurate
over time.
    
 
   
A valuation allowance has been established to reduce the deferred tax asset for
investment losses to the amount that, based upon available evidence, is in
management's judgment more likely than not to be realized. The valuation
allowance is evaluated as of each balance sheet date.
    
 
   
INTEREST RATES
    
 
   
Interest rates remained relatively stable during 1996 and 1997, before declining
in 1998. The Federal Reserve Board lowered rates 3 times during the second half
of 1998, resulting in a steeper yield curve due to the lower short-term interest
rates.
    
 
   
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, We can adjust Our crediting rates on fixed annuities
and other interest-bearing liabilities. However, competitive conditions and
contractual commitments do not always permit the reduction in crediting rates to
fully or immediately reflect reductions in investment yield. This can result in
narrower spreads.
    
 
   
A rising interest rate environment can increase net investment income as well as
contribute to both realized and unrealized fixed maturity investment losses. A
declining interest rate environment can decrease net investment income as well
as contribute to both realized and unrealized fixed maturity investment gains.
Also, lower renewal crediting rates on annuities, compared with competitors'
higher new money crediting rates, have influenced certain annuity holders to
seek alternative products. We mitigate this risk somewhat by charging surrender
fees, which decrease over time, when annuity holders withdraw funds prior to
maturity on certain annuity products. Approximately 46 percent of KILICO's fixed
and variable annuity liabilities as of December 31, 1998, however, were no
longer subject to significant surrender fees.
    
 
   
LIQUIDITY AND CAPITAL RESOURCES
    
 
   
We carefully monitor cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of Our
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments.
    
 
   
RATINGS
    
 
   
Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in Our claims-paying ability or
financial strength ratings could result in Our products being less attractive to
consumers. Any reductions in Our parent's ratings could also adversely impact
Our financial flexibility.
    
 
   
Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
    
 
   
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
    
 
                                       59
<PAGE>   64
 
   
STOCKHOLDER'S EQUITY
    
 
   
Stockholder's equity totaled $853.9 million at December 31, 1998, compared with
$865.6 million at December 31, 1997, and $751.0 million at December 31, 1996.
The 1998 decrease in stockholder's equity was primarily due to dividends of
$95.0 million paid to Kemper during 1998. This decrease was offset by 1998 net
income of $65.1 million and an increase of $20.3 million in accumulated other
comprehensive income. The increase in accumulated other comprehensive income was
primarily related to the change in unrealized appreciation related to Our fixed
maturity investment portfolio due to falling interest rates during 1998. The
1997 increase in stockholder's equity was primarily due to net income of $38.7
million, a $45.0 million capital contribution and an increase in accumulated
other comprehensive income related to the change in unrealized appreciation of
$60.1 million related to Our fixed maturity investment portfolio. These
increases were offset by a dividend of $29.2 million to Kemper.
    
 
   
EMERGING ISSUE
    
 
   
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement is effective for fiscal years
beginning after June 15, 1999. Full implementation of SFAS No. 133 is expected
in December 1999. The impact of implementation is not expected to be material to
KILICO.
    
 
                                       60
<PAGE>   65
 
   
                   KILICO'S DIRECTORS AND EXECUTIVE OFFICERS
    
 
   
<TABLE>
<CAPTION>
            NAME AND AGE
        POSITION WITH KILICO
          YEAR OF ELECTION                OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
        --------------------              -----------------------------------------------------
<S>                                    <C>
John B. Scott (54)                     Chief Executive Officer, President and Director of Federal
Chief Executive Officer since          Kemper Life Assurance Company (FKLA) and Fidelity Life
February 1992. President since         Association (FLA) since 1988. Chief Executive Officer,
November 1993. Director since 1992.    President and Director of Zurich Life Insurance Company of
                                       America (ZLICA) and Zurich Direct, Inc. (ZD) since March
                                       1996. Chairman of the Board and Director of Investors
                                       Brokerage Services, Inc. (IBS) and Investors Brokerage
                                       Services Insurance Agency, Inc. (IBSIA) since 1993. Chairman
                                       of the Board of FKLA and FLA from April 1988 to January
                                       1996. Chairman of the Board of KILICO from February 1992 to
                                       January 1996. Executive Vice President and Director of
                                       Kemper Corporation (Kemper) since January 1994 and March
                                       1996, respectively. Executive Vice President of Kemper
                                       Financial Companies, Inc. from January 1994 to January 1996
                                       and Director from 1992 to January 1996.
 
Eliane C. Frye (51)                    Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995.   Executive Vice President of ZLICA and ZD since March 1996.
Director since May 1998.               Director of FLA since December 1997. Director of FKLA and
                                       ZLICA since May 1998. Director of ZD from March 1996 to
                                       March 1997. Director of IBS and IBSIA since 1995. Senior
                                       Vice President of KILICO, FKLA and FLA from 1993 to 1995.
                                       Vice President of FKLA and FLA from 1988 to 1993.
 
Frederick L. Blackmon (47)             Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief        since December 1995. Senior Vice President and Chief
Financial Officer since December       Financial Officer of FLA since January 1996. Senior Vice
1995.                                  President and Chief Financial Officer of ZLICA since March
                                       1996. Senior Vice President and Chief Financial Officer of
                                       ZD since March 1996. Director of FLA since May 1998.
                                       Director of ZD from March 1996 to March 1997. Treasurer and
                                       Chief Financial Officer of Kemper since January 1996. Chief
                                       Financial Officer of Alexander Hamilton Life Insurance
                                       Company from April 1989 to November 1995.
 
James C. Harkensee (40)                Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January    Senior Vice President of ZLICA since 1995. Senior Vice
1996.                                  President of ZD since 1995. Director of ZD from April 1993
                                       to March 1997 and since March 1998. Vice President of ZLICA
                                       from 1992 to 1995. Chief Actuary of ZLICA from 1991 to 1994.
                                       Assistant Vice President of ZLICA from 1990 to 1992. Vice
                                       President of ZD from 1994 to 1995.
</TABLE>
    
 
                                       61
<PAGE>   66
 
   
<TABLE>
<CAPTION>
            NAME AND AGE
        POSITION WITH KILICO
          YEAR OF ELECTION                OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
        --------------------              -----------------------------------------------------
<S>                                    <C>
James E. Hohmann (43)                  Senior Vice President of FKLA since December 1995. Chief
Senior Vice President since December   Actuary of FKLA and KILICO from December 1995 to January
1995. Director since May 1998.         1999. Senior Vice President of FLA since January 1996. Chief
                                       Actuary of FLA from January 1996 to January 1999. Senior
                                       Vice President of ZLICA and ZD since March 1996. Chief
                                       Actuary of ZLICA and ZD from March 1996 to January 1999.
                                       Director of FLA since June 1997. Director of FKLA and ZLICA
                                       since May 1998. Director of ZD from March 1996 to March
                                       1997. Managing Principal (Partner) of Tillinghast-Towers
                                       Perrin from January 1991 to December 1995.
                                       Consultant/Principal (Partner) of Tillinghast-Towers Perrin
                                       from November 1986 to January 1991.
 
Edward K. Loughridge (44)              Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate    FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January      Corporate Development Officer for ZLICA and ZD since March
1996.                                  1996. Senior Vice President of Human Resources of
                                       Zurich-American Insurance Group from February 1992 to March
                                       1996.
 
Debra P. Rezabek (43)                  Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996.      Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate  Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996.          FKLA and FLA since 1995. General Counsel and Director of
                                       Government Affairs of FKLA and FLA since 1992 and of KILICO
                                       since 1993. Senior Vice President, General Counsel and
                                       Corporate Secretary of ZLICA since March 1996. Senior Vice
                                       President, General Counsel and Corporate Secretary of ZD
                                       since March 1996. Director of ZD from March 1996 to March
                                       1997. Secretary of IBS and IBSIA since 1993. Director of IBS
                                       and IBSIA from 1993 to 1996. Assistant General Counsel of
                                       FKLA and FLA from 1988 to 1992. General Counsel and
                                       Assistant Secretary of KILICO, FKLA and FLA from 1992 to
                                       1996. Assistant Secretary of Kemper since January 1996.
 
Kenneth M. Sapp (53)                   Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January    1998. Director of IBS since May 1998. Director of IBSIA
1998.                                  since September 1998. Vice President--Aetna Life Brokerage
                                       of Aetna Life & Annuity Company from February 1992 to
                                       January 1998.
 
George Vlaisavljevich (56)             Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October    1996. Senior Vice President of ZD since March 1997. Director
1996.                                  of IBS and IBSIA since October 1996. Executive Vice
                                       President of The Copeland Companies from April 1983 to
                                       September 1996.
 
Loren J. Alter (60)                    Director of FKLA, FLA and Scudder Kemper Investments, Inc.
Director since January 1996.           (SKI) since January 1996. Director of ZLICA since May 1979.
                                       Executive Vice President and Chief Financial Officer of
                                       Zurich U.S. since 1979. President, Chief Executive Officer
                                       and Director of Kemper since January 1996.
</TABLE>
    
 
                                       62
<PAGE>   67
 
   
<TABLE>
<CAPTION>
            NAME AND AGE
        POSITION WITH KILICO
          YEAR OF ELECTION                OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
        --------------------              -----------------------------------------------------
<S>                                    <C>
William H. Bolinder (55)               Chairman of the Board and Director of FKLA and FLA since
Chairman of the Board and Director     January 1996. Chairman of the Board of ZLICA and ZD since
since January 1996.                    March 1995. Chairman of the Board and Director of Kemper
                                       since January 1996. Director of SKI since January 1996. Vice
                                       Chairman of SKI from January 1996 to 1998. Member of the
                                       Group Executive Board of Zurich Financial Services Group
                                       since 1998. Member of the Corporate Executive Board of
                                       Zurich Insurance Group from October 1994 to 1998. Chairman
                                       of Zurich American Insurance Company since 1998. Chairman of
                                       the Board of American Guarantee and Liability Insurance
                                       Company, Zurich American Insurance Company of Illinois,
                                       American Zurich Insurance Company and Steadfast Insurance
                                       Company since 1995. Chief Executive Officer of American
                                       Guarantee and Liability Insurance Company, Zurich American
                                       Insurance Company of Illinois and American Zurich Insurance
                                       Company from 1986 to June 1995. President of Zurich Holding
                                       Company of America since 1986. Manager of Zurich Insurance
                                       Company, U.S. Branch from 1986 to 1998. Underwriter for
                                       Zurich American Lloyds since 1986.
 
David A. Bowers (52)                   Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997.               since June 1997. Executive Vice President, Corporate
                                       Secretary and General Counsel of Zurich U.S. since August
                                       1985. Vice President, General Counsel and Secretary of
                                       Kemper since January 1996.
 
Gunther Gose (54)                      Director of FKLA, FLA and ZLICA since November 1998. Chief
Director since November 1998.          Financial Officer and Member of the Group Executive Board of
                                       Zurich Financial Services since October 1998. Member of the
                                       Corporate Executive Board of Zurich Insurance Group from
                                       April 1990 to October 1998.
</TABLE>
    
 
                                       63
<PAGE>   68
 
   
                             EXECUTIVE COMPENSATION
    
 
   
                           SUMMARY COMPENSATION TABLE
    
 
   
<TABLE>
<S>                           <C>     <C>           <C>            <C>             <C>                 <C>
                                                                                     LONG TERM
                                                                                   COMPENSATION
                                                 ANNUAL COMPENSATION                  AWARDS
                                      -------------------------------------------------------------
                                                                                     LONG TERM
                                                                      OTHER          INCENTIVE
                                                                      ANNUAL           PLAN             ALL OTHER
         NAME AND                                      BONUS       COMPENSATION       PAYOUTS          COMPENSATION
    PRINCIPAL POSITION        YEAR    SALARY ($)      ($)(2)          ($)(3)          ($)(2)           ($)(4)(5)(6)
-------------------------------------------------------------------------------------------------------------------
John B. Scott..............   1998     $171,000      $ --            $--             $ --                $ 38,326
Chief Executive Officer(1)    1997      171,000       112,100         --              239,400              64,089
                              1996      212,500        94,000         --              212,500             142,498
Eliane C. Frye.............   1998      107,160        --             --               --                  18,024
Executive Vice President(1)   1997       98,040        47,515         --               91,590              30,311
                              1996      105,000        41,750         --               69,750              58,520
Frederick L. Blackmon......   1998       94,160        --             --               --                   8,977
Senior Vice President and     1997       96,300        54,225         --              112,500              19,543
  Chief Financial
    Officer(1)                1996      100,583        47,000         27,924           71,250              11,226
George Vlaisavljevich......   1998      260,000        --             --               --                  23,236
Senior Vice President(1)...   1997      252,500       146,000         39,922          243,000               9,165
James E. Hohmann...........   1998       88,400        --             --               --                   7,823
Senior Vice President and     1997       79,333        45,500         --               80,150               1,063
  Chief Actuary(1)            1996      113,333        --             --               --                  11,333
</TABLE>
    
 
---------------
   
(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of the
    time devoted to duties as executive officer of KILICO has been made. All
    compensation items reported in the Summary Compensation Table reflect this
    allocation.
    
 
   
(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
    the bonuses earned in 1998 were not available as of the date of this filing.
    
 
   
(3) The amounts disclosed in this column include:
    
   
    (a) Amounts paid as non-preferential dividend equivalents on shares of
    restricted stock and phantom stock units.
    
   
    (b) The cash value of shares of Kemper common stock when awarded under the
    Kemper Anniversary Award Plan. Employees were awarded shares on an
    increasing scale beginning with their 10th year of employment and every 5
    years thereafter, with a pro rata award at retirement.
    
   
    (c) The taxable benefit from personal use of an employer-provided automobile
    and certain estate planning services facilitated for executives.
    
   
    (d) Relocation expense reimbursements of $21,437 in 1996 for Mr. Blackmon
    and $24,498 for Mr. Vlaisavljevich in 1997.
    
 
   
(4) The amounts in this column include:
    
   
    (a) The amounts of employer contributions allocated to the accounts of the
    named persons under profit sharing plans or under supplemental plans
    maintained to provide benefits in excess of applicable ERISA limitations.
    
   
    (b) Distributions from the Kemper and FKLA supplemental plans.
    
 
                                       64
<PAGE>   69
 
   
(5) Pursuant to the Conseco Merger Agreement, which was an agreement that was
    subsequently terminated as the result of a failed merger attempt by Conseco,
    the restricted stock awards for 1993 and 1994 were cancelled. To replace
    these awards, on June 30, 1994, the Committee, under the Kemper Bonus
    Restoration Plan and in its sole discretion, granted cash awards to the
    named executive officers and other affected executives entitling each of
    them to receive an amount in cash immediately prior to the effective time of
    the then-planned Conseco merger equal to the product of the number of shares
    of restricted stock previously granted to such individual under the 1993
    Senior Executive Long-Term Incentive Plan multiplied by the consideration
    payable in the merger. As a result of the termination of the Conseco Merger
    Agreement, no cash awards were paid pursuant to the Kemper Bonus Restoration
    Plan.
    
 
   
    In January 1995, the board of directors, upon the advice of the Committee,
    approved the adoption of the Kemper 1995 Executive Incentive Plan under
    which active employee holders of the previously cancelled shares of
    restricted stock were granted phantom stock units by the Committee equal to
    the number of shares cancelled plus an added amount representing 20 percent
    of the Aggregate cancelled shares. The 20 percent supplement was awarded in
    recognition of the imposition of new vesting periods on the phantom awards
    (to the extent the restricted stock held prior to cancellation would
    otherwise have vested in June 1994 had stockholder approval of the affected
    restricted stock plan been obtained as earlier anticipated).
    
 
   
    By their terms, the phantom stock units associated with cancelled shares of
    restricted stock originally awarded in 1993, as supplemented, would have
    vested on December 31, 1995 and entitled the holders to a cash payment (net
    of any required tax withholding) determined by the value of Kemper's common
    stock based on an average trading range to December 31, 1995, and those
    phantom stock units associated with the cancelled restricted stock
    originally awarded in 1994 could similarly have vested and been paid on
    December 31, 1996, subject to ongoing employment to the respective vesting
    dates. Notwithstanding these vesting provisions, the phantom stock units
    earlier vested and entitled payment upon the consummation of a "change of
    control" of Kemper. Dividend equivalents were payable to holders of the
    phantom stock units as compensation income when and as dividends were paid
    on Kemper's outstanding common stock, and the Executive Incentive Plan
    provided for standard anti-dilution adjustments.
    
 
   
    Phantom stock units awarded to the named executive officers subject to
    vesting on December 31, 1996, were Mr. Scott 12,600 phantom units and Ms.
    Frye 1,680 phantom units. All phantom stock units vested and were paid
    immediately prior to the effectiveness of the January 4, 1996 acquisition of
    Kemper by Zurich and Insurance Partners. Mr. Scott and Ms. Frye received
    allocated cash out payments of $430,272, and $80,317, respectively, in 1996.
    
 
   
(6) Pursuant to the terms of a Termination Protection Agreement with Kemper
    dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
    payments were made by Kemper and no portion of the payments were allocated
    to KILICO.
    
 
                                       65
<PAGE>   70
 
             TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
 
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements; Independent Auditors' Report; Financial
Statements of the Separate Account; Appendix A Table of Historical Hypothetical
Accumulation Unit Values and Performance Information; and Appendix B State
Premium Tax Chart. The Statement of Additional Information should be read in
conjunction with this Prospectus.
 
                              FINANCIAL STATEMENTS
 
The financial statements of KILICO that are included in this Prospectus should
be considered primarily as bearing on the ability of KILICO to meet its
obligations under the Certificates. The Certificates are not entitled to
participate in earnings, dividends or surplus of KILICO.
 
                             CHANGE OF ACCOUNTANTS
 
   
On September 12, 1997, KILICO appointed the accounting firm of
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), formerly Coopers &
Lybrand, L.L.P., as independent accountants for the year ended December 31, 1997
to replace KPMG LLP effective with such appointment. Our Board of Directors
approved the selection of PricewaterhouseCoopers as the new independent
accountants. Management had not consulted with PricewaterhouseCoopers on any
accounting, auditing or reporting matter, prior to that time.
    
 
   
During the fiscal year ended December 31, 1996, there were no disagreements with
KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events.
KPMG LLP's report on the financial statements for 1996 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
    
 
   
There were no disagreements with PricewaterhouseCoopers on accounting or
financial disclosures for the years ended December 31, 1998 or 1997.
    
 
                                       66
<PAGE>   71
 
   
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
    
 
   
The Board of Directors and Stockholder of
    
   
Kemper Investors Life Insurance Company:
    
 
   
In our opinion, the accompanying consolidated balance sheets as of December 31,
1998 and 1997 and the related consolidated statements of operations,
comprehensive income, stockholder's equity and cash flows present fairly, in all
material respects, the financial position of Kemper Investors Life Insurance
Company and subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. The financial
statements of the Company for the period from January 4, 1996 to December 31,
1996 were audited by other independent accountants whose report, dated March 21,
1997, expressed an unqualified opinion on those statements.
    
 
   
                           PricewaterhouseCoopers LLP
    
   
Chicago, Illinois
    
   
March 12, 1999
    
 
                                       67
<PAGE>   72
 
   
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
    
 
   
The Board of Directors and Stockholder
    
   
Kemper Investors Life Insurance Company:
    
 
   
We have audited the accompanying consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of Kemper Investors
Life Insurance Company and subsidiaries for the period from January 4, 1996 to
December 31, 1996. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as of
December 31, 1996 as listed in the accompanying index. These financial statement
schedules are incorporated by reference to a previously filed Form 10-K. These
consolidated financial statements and the financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedules based on our
audit.
    
 
   
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
    
 
   
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the results of operations and the cash flows
of Kemper Investors Life Insurance Company and subsidiaries for the period from
January 4, 1996 to December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the aforementioned supplementary
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
    
 
   
                                          KPMG LLP
    
 
   
Chicago, Illinois
    
   
March 21, 1997
    
 
                                       68
<PAGE>   73
 
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
 
   
                          CONSOLIDATED BALANCE SHEETS
    
   
                       (in thousands, except share data)
    
 
   
<TABLE>
<CAPTION>
                                                              DECEMBER 31   DECEMBER 31
                                                                 1998          1997
                                                              -----------   -----------
<S>                                                           <C>           <C>
ASSETS
Fixed maturities, available for sale, at fair value
  (amortized cost: December 31, 1998,.......................
  $3,421,535; December 31, 1997, $3,644,075)................  $3,482,820    $ 3,668,643
Trading account securities at fair value (amortized cost:
  December 31, 1998, $99,095)...............................     101,781        --
Short-term investments......................................      58,334        236,057
Joint venture mortgage loans................................      65,806         72,663
Third-party mortgage loans..................................      76,520        102,974
Other real estate-related investments.......................      22,049         44,409
Policy loans................................................     271,540        282,439
Equity securities...........................................      66,854         24,839
Other invested assets.......................................      23,645         20,820
                                                              -----------   -----------
          Total investments.................................   4,169,349      4,452,844
Cash........................................................      13,486         23,868
Accrued investment income...................................     124,213        117,789
Goodwill....................................................     216,651        229,393
Value of business acquired..................................     118,850        138,482
Deferred insurance acquisition costs........................      91,543         59,459
Deferred income taxes.......................................      35,059         39,993
Reinsurance recoverable.....................................     344,837        382,609
Receivable on sales of securities...........................       3,500         20,076
Other assets and receivables................................      23,029          3,187
Assets held in separate accounts............................   7,099,204      5,121,950
                                                              -----------   -----------
          Total assets......................................  $12,239,721   $10,589,650
                                                              ===========   ===========
LIABILITIES
Future policy benefits......................................  $3,906,391    $ 4,239,480
Benefits and funds payable..................................     318,369        150,524
Other accounts payable and liabilities......................      61,898        212,133
Liabilities related to separate accounts....................   7,099,204      5,121,950
                                                              -----------   -----------
          Total liabilities.................................  11,385,862      9,724,087
                                                              -----------   -----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
  authorized 300,000 shares; outstanding 250,000 shares.....       2,500          2,500
Additional paid-in capital..................................     804,347        806,538
Accumulated other comprehensive income......................      32,975         12,637
Retained earnings...........................................      14,037         43,888
                                                              -----------   -----------
          Total stockholder's equity........................     853,859        865,563
                                                              -----------   -----------
          Total liabilities and stockholder's equity........  $12,239,721   $10,589,650
                                                              ===========   ===========
</TABLE>
    
 
   
See accompanying notes to consolidated financial statements.
    
 
                                       69
<PAGE>   74
 
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
 
   
                     CONSOLIDATED STATEMENTS OF OPERATIONS
    
   
                                 (in thousands)
    
 
   
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                        --------------------------------------
                                                          1998         1997          1996
                                                        --------     --------   --------------
<S>                                                     <C>          <C>        <C>
REVENUE
Net investment income.................................  $273,512     $296,195      $299,688
Realized investment gains.............................    51,868       10,546        13,602
Premium income........................................    22,346       22,239         7,822
Separate account fees and charges.....................    61,982       85,413        25,309
Other income..........................................    10,031       11,087         9,786
                                                        --------     --------      --------
          Total revenue...............................   419,739      425,480       356,207
                                                        --------     --------      --------
BENEFITS AND EXPENSES
Interest credited to policyholders....................   176,906      199,782       223,094
Claims incurred and other policyholder benefits.......    28,029       28,372        14,255
Taxes, licenses and fees..............................    30,292       52,608         2,173
Commissions...........................................    39,046       32,602        25,962
Operating expenses....................................    44,575       36,837        24,678
Deferral of insurance acquisition costs...............   (46,565)     (38,177)      (27,820)
Amortization of insurance acquisition costs...........    12,082        3,204         2,316
Amortization of value of business acquired............    17,677       24,948        21,530
Amortization of goodwill..............................    12,744       15,295        10,195
                                                        --------     --------      --------
          Total benefits and expenses.................   314,786      355,471       296,383
                                                        --------     --------      --------
Income before income tax expense......................   104,953       70,009        59,824
Income tax expense....................................    39,804       31,292        25,403
                                                        --------     --------      --------
          Net income..................................  $ 65,149     $ 38,717      $ 34,421
                                                        ========     ========      ========
</TABLE>
    
 
   
See accompanying notes to consolidated financial statements.
    
 
                                       70
<PAGE>   75
 
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
    
   
                                 (in thousands)
    
 
   
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                            --------------------------------
                                                              1998        1997        1996
                                                            --------    --------    --------
<S>                                                         <C>         <C>         <C>
NET INCOME..............................................    $ 65,149    $ 38,717    $ 34,421
                                                            --------    --------    --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
  Unrealized holding gains (losses) on investments
     arising during period:
     Unrealized holdings gains (losses) on
       investments......................................      25,372      60,802     (84,036)
     Adjustment to value of business acquired...........      (9,332)    (28,562)     16,735
     Adjustment to deferred insurance acquisition
       costs............................................      (2,862)     (2,680)      1,307
                                                            --------    --------    --------
          Total unrealized holding gains (losses) on
            investments arising during period...........      13,178      29,560     (65,994)
                                                            --------    --------    --------
  Less reclassification adjustments for items included
     in net income:
     Adjustment for (gains) losses included in realized
       investment gains.................................       6,794      (9,016)      3,963
     Adjustment for amortization of premium on fixed
       maturities included in net investment income.....     (17,064)    (17,866)    (26,036)
     Adjustment for (gains) losses included in
       amortization of value of business acquired.......      (7,378)     (2,353)     (4,212)
     Adjustment for (gains) losses included in
       amortization of insurance acquisition costs......        (463)       (355)      --
                                                            --------    --------    --------
          Total reclassification adjustments for items
            included in net income......................     (18,111)    (29,590)    (26,285)
                                                            --------    --------    --------
Other comprehensive income (loss), before related income
  tax expense (benefit)                                       31,289      59,150     (39,709)
Related income tax expense (benefit)....................      10,952        (985)      7,789
                                                            --------    --------    --------
          Other comprehensive income (loss), net of
            tax.........................................      20,337      60,135     (47,498)
                                                            --------    --------    --------
          Comprehensive income (loss)...................    $ 85,486    $ 98,852    $(13,077)
                                                            ========    ========    ========
</TABLE>
    
 
   
See accompanying notes to consolidated financial statements.
    
 
                                       71
<PAGE>   76
 
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
 
   
                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
    
   
                                 (in thousands)
    
 
   
<TABLE>
<CAPTION>
                                                                     DECEMBER 31
                                                          ----------------------------------
                                                            1998         1997         1996
                                                          --------     --------     --------
<S>                                                       <C>          <C>          <C>
CAPITAL STOCK, beginning and end of period..............  $  2,500     $  2,500     $  2,500
                                                          --------     --------     --------
 
ADDITIONAL PAID-IN CAPITAL, beginning of period.........   806,538      761,538      743,104
Capital contributions from parent.......................     4,261       45,000       18,434
Adjustment to prior period capital contribution from
  parent................................................    (6,452)          --           --
                                                          --------     --------     --------
          End of period.................................   804,347      806,538      761,538
                                                          --------     --------     --------
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning
  of period.............................................    12,637      (47,498)       --
Other comprehensive income (loss), net of tax...........    20,338       60,135      (47,498)
                                                          --------     --------     --------
          End of period.................................    32,975       12,637      (47,498)
                                                          --------     --------     --------
 
RETAINED EARNINGS, beginning of period..................    43,888       34,421        --
Net income..............................................    65,149       38,717       34,421
Dividends to parent.....................................   (95,000)     (29,250)       --
                                                          --------     --------     --------
          End of period.................................    14,037       43,888       34,421
                                                          --------     --------     --------
 
          Total stockholder's equity....................  $853,859     $865,563     $750,961
                                                          ========     ========     ========
</TABLE>
    
 
   
See accompanying notes to consolidated financial statements.
    
 
                                       72
<PAGE>   77
 
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
    
   
                                 (in thousands)
    
 
   
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                              -------------------------------------
                                                                 1998         1997         1996
                                                              -----------   ---------   -----------
<S>                                                           <C>           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income................................................  $    65,149   $  38,717   $    34,421
  Reconcilement of net income to net cash provided:
    Realized investment gains...............................      (51,868)    (10,546)      (13,602)
    Net change in trading account securities................       (6,727)     --           --
    Interest credited and other charges.....................      173,958     198,206       230,298
    Deferred insurance acquisition costs....................      (34,483)    (34,973)      (25,504)
    Amortization of value of business acquired..............       17,677      24,948        21,530
    Amortization of goodwill................................       12,744      15,295        10,195
    Amortization of discount and premium on investments.....       17,353      17,866        25,743
    Deferred income taxes...................................      (12,469)    (99,370)         (897)
    Net change in current federal income taxes..............      (73,162)     97,386       108,806
    Benefits and premium taxes due related to separate
      account bank-owned life insurance.....................      123,884     180,546       --
    Other, net..............................................      (41,477)     17,168       (22,283)
                                                              -----------   ---------   -----------
         Net cash provided from operating activities........      190,579     445,243       368,707
                                                              -----------   ---------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Cash from investments sold or matured:
    Fixed maturities held to maturity.......................      491,699     229,208       264,383
    Fixed maturities sold prior to maturity.................      882,596     633,872       891,995
    Equity securities.......................................      107,598      --           --
    Mortgage loans, policy loans and other invested
      assets................................................      180,316     131,866       168,727
  Cost of investments purchased or loans originated:
    Fixed maturities........................................   (1,319,119)   (606,028)   (1,369,091)
    Equity securities.......................................      (83,303)     --           --
    Mortgage loans, policy loans and other invested
      assets................................................      (66,331)    (76,350)     (119,044)
  Short-term investments, net...............................      177,723    (164,361)      300,819
  Net change in receivable and payable for securities
    transactions............................................         (677)     29,746       (31,667)
  Net change in other assets................................      --              244           115
                                                              -----------   ---------   -----------
         Net cash provided by investing activities..........      370,502     178,197       106,237
                                                              -----------   ---------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Policyholder account balances:
    Deposits................................................      180,124     145,687       141,159
    Withdrawals.............................................     (649,400)   (745,510)     (700,084)
  Capital contributions from parent.........................        4,261      45,000        18,434
  Dividends to parent.......................................      (95,000)    (29,250)      --
  Other.....................................................      (11,448)    (18,275)       42,512
                                                              -----------   ---------   -----------
         Net cash used in financing activities..............     (571,463)   (602,348)     (497,979)
                                                              -----------   ---------   -----------
             Net increase (decrease) in cash................      (10,382)     21,092       (23,035)
CASH, beginning of period...................................       23,868       2,776        25,811
                                                              -----------   ---------   -----------
CASH, end of period.........................................  $    13,486   $  23,868   $     2,776
                                                              ===========   =========   ===========
</TABLE>
    
 
   
See accompanying notes to consolidated financial statements.
    
 
                                       73
<PAGE>   78
 
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
 
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
 
   
BASIS OF PRESENTATION
    
 
   
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). Effective January 4, 1996, Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") owned 80 percent and 20
percent, respectively, of Kemper and therefore the Company. On February 27,
1998, Zurich acquired Insurance Partner's remaining 20 percent interest for
cash. As a result of this transaction, Kemper and the Company became
wholly-owned subsidiaries of Zurich.
    
 
   
Effective September 7, 1998, the businesses of Zurich merged with the financial
services business of B.A.T. Industries forming Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG, representing
the financial interest of the former Zurich Group, is listed on the Swiss Market
Index, replacing Zurich. Allied Zurich p.l.c., representing the financial
interest of B.A.T. Industries, is included in the FTSE-100 Share Index in
London.
    
 
   
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements in order for them to conform to the 1998
presentation.
    
 
   
BASIS OF ACCOUNTING
    
 
   
The acquisition of the Company on January 4, 1996, was accounted for using the
purchase method of accounting. The consolidated financial statements of the
Company prior to January 4, 1996, were prepared on a historical cost basis in
accordance with generally accepted accounting principles. The accompanying
consolidated financial statements of the Company as of and for the years ended
December 31, 1996, 1997 and 1998, have been prepared in conformity with
generally accepted accounting principles.
    
 
   
ESTIMATES
    
 
   
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets or liabilities at the date of the financial
statements. As a result, actual results reported as revenue and expenses could
differ from the estimates reported in the accompanying financial statements. As
further discussed in the accompanying notes to the consolidated financial
statements, significant estimates and assumptions affect deferred insurance
acquisition costs, the value of business acquired, provisions for real
estate-related losses and reserves, other-than-temporary declines in values for
fixed maturities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.
    
 
                                       74
<PAGE>   79
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    
   
GOODWILL
    
 
   
The Company reviews goodwill to determine if events or changes in circumstances
may have affected the recoverability of the outstanding goodwill as of each
reporting period. In the event that the Company determines that goodwill is not
recoverable, it would amortize such amounts as additional goodwill expense in
the accompanying financial statements. As of December 31, 1998, the Company
believes that no such adjustment is necessary.
    
 
   
The Company began to amortize goodwill during 1996 on a straight-line basis over
twenty-five years. In December of 1997, the Company changed its amortization
period to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, the Company
recorded an increase in goodwill amortization expense of $5.1 million during
1997.
    
 
   
VALUE OF BUSINESS ACQUIRED
    
 
   
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
    
 
   
The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2003 are as follows:
    
 
   
<TABLE>
<CAPTION>
                                                                                       PROJECTED
              (IN THOUSANDS)                 BEGINNING                  ACCRETION OF    ENDING
          YEAR ENDED DECEMBER 31              BALANCE    AMORTIZATION     INTEREST      BALANCE
------------------------------------------   ---------   ------------   ------------   ---------
<S>                                          <C>         <C>            <C>            <C>
1996 (actual).............................   $190,222      $(31,427)       $9,897      $168,692
1997 (actual).............................    168,692       (34,906)        9,958       143,744
1998 (actual).............................    143,744       (26,807)        9,129       126,066
1999......................................    126,066       (24,926)        7,741       108,881
2000......................................    108,881       (22,649)        6,619        92,851
2001......................................     92,851       (20,736)        5,577        77,692
2002......................................     77,692       (17,096)        4,695        65,291
2003......................................     65,291       (15,504)        3,948        53,735
</TABLE>
    
 
   
The projected ending balance of the value of business acquired will be further
adjusted to reflect the impact of unrealized gains or losses on fixed maturities
held as available for sale in the investment portfolio. Such adjustments are not
recorded in the Company's net income but rather are recorded as a credit or
charge to accumulated other comprehensive income, net of income tax. As of
December 31, 1998 and 1997, this
    
 
                                       75
<PAGE>   80
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    
   
adjustment decreased the value of business acquired by $7.2 million and $5.3
million, respectively, and accumulated other comprehensive income by
approximately $4.7 million and $3.4 million, respectively.
    
 
   
LIFE INSURANCE REVENUE AND EXPENSES
    
 
   
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs.
    
 
   
Premiums for term life policies are reported as earned when due. Profits for
such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
    
 
   
DEFERRED INSURANCE ACQUISITION COSTS
    
 
   
The costs of acquiring new business, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life insurance products are being
amortized over the estimated contract life in relation to the present value of
estimated gross profits. Deferred insurance acquisition costs related to such
interest-sensitive products also reflect the estimated impact of unrealized
gains or losses on fixed maturities held as available for sale in the investment
portfolio, through a credit or charge to accumulated other comprehensive income,
net of income tax. The deferred insurance acquisition costs for term-life
insurance products are being amortized over the premium paying period of the
policies.
    
 
   
FUTURE POLICY BENEFITS
    
 
   
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 7.5 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 2.5 percent to 12.0
percent.
    
 
   
Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 6.8 percent.
    
 
   
GUARANTY FUND ASSESSMENTS
    
 
   
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1998 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
    
 
                                       76
<PAGE>   81
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    
   
assessed in the future for which the life insurance industry has estimated the
cost to cover losses to policyholders.
    
 
   
INVESTED ASSETS AND RELATED INCOME
    
 
   
Investments in fixed maturities and equity securities are carried at fair value.
Short-term investments are carried at cost, which approximates fair value.
    
 
   
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed and
asset-backed securities, over the estimated life of the security. Such
amortization is included in net investment income. Amortization of the discount
or premium from mortgage-backed and asset-backed securities is recognized using
a level effective yield method which considers the estimated timing and amount
of prepayments of the underlying loans and is adjusted to reflect differences
which arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. To the extent that the estimated
lives of such securities change as a result of changes in prepayment rates, the
adjustment is also included in net investment income. The Company does not
accrue interest income on fixed maturities deemed to be impaired on an
other-than-temporary basis, or on mortgage loans and other real estate loans
where the likelihood of collection of interest is doubtful.
    
 
   
Mortgage loans are carried at their unpaid balance, net of unamortized discount
and any applicable reserves or write-downs. Other real estate-related
investments, net of any applicable reserves and write-downs, include: (1) notes
receivable from real estate ventures; (2) investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures, and
(3) real estate owned at December 31, 1997, carried at fair value. Real estate
reserves are established when declines in collateral values, estimated in light
of current economic conditions, indicate a likelihood of loss.
    
 
   
Investments in policy loans and other invested assets, consisting primarily of
venture capital investments and a leveraged lease, are carried primarily at
cost.
    
 
   
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Net unrealized gains or losses
on revaluation of investments are credited or charged to accumulated other
comprehensive income. Such unrealized gains are recorded net of deferred income
tax expense, while unrealized losses are not tax benefitted.
    
 
   
SEPARATE ACCOUNT BUSINESS
    
 
   
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.
    
 
                                       77
<PAGE>   82
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    
   
INCOME TAX
    
 
   
For the period January 1 through January 4, 1996, the Company's federal income
tax return was consolidated with Kemper and Kemper's other wholly-owned life
insurance subsidiary, Federal Kemper Life Assurance Company ("FKLA"). The Boards
of Directors of Kemper, KILICO and FKLA, adopted a written plan that provided
that federal income taxes would be paid to or recovered from Kemper on the basis
of each company's taxable income or loss as shown on its respective federal
income tax return. In the event of a federal income tax credit which is greater
than the amount recoverable from the other life insurance company or from the
Internal Revenue Service, the funds available would be apportioned among the
life companies entitled to a recovery on the basis of the relationship of each
company's tax credit to the total of all of the life insurance companies in a
deficit position. For the period January 5 through December 31, 1996, and
subsequent years, the Company has filed a separate federal income tax return.
    
 
   
Deferred taxes are provided on the temporary differences between the tax and
financial statement basis of assets and liabilities.
    
 
   
(2) CASH FLOW INFORMATION
    
 
   
The Company defines cash as cash in banks and money market accounts. The Company
paid federal income taxes of $126.0 million, $29.0 million and $28.1 million
directly to the United States Treasury Department during 1998, 1997 and 1996
respectively.
    
 
                                       78
<PAGE>   83
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(3) INVESTED ASSETS AND RELATED INCOME
    
 
   
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
value of fixed maturities compared with amortized cost, adjusted for
other-than-temporary declines in value, were as follows:
    
 
   
<TABLE>
<CAPTION>
                                                                             ESTIMATED UNREALIZED
                                                    CARRYING    AMORTIZED    --------------------
                                                     VALUE         COST       GAINS      LOSSES
                 (in thousands)                     --------    ---------     -----      ------
<S>                                                <C>          <C>          <C>        <C>
DECEMBER 31, 1998
U.S. treasury securities and obligations of U.S.
  government agencies and authorities............  $    7,951   $    7,879   $    81    $     (9)
Obligations of states and political subdivisions,
  special revenue and nonguaranteed..............      27,039       26,768       362         (91)
Debt securities issued by foreign governments....      69,357       67,239     2,266        (148)
Corporate securities.............................   1,908,850    1,866,372    46,664      (4,186)
Mortgage and asset-backed securities.............   1,469,623    1,453,277    19,063      (2,717)
                                                   ----------   ----------   -------    --------
       Total fixed maturities....................  $3,482,820   $3,421,535   $68,436    $ (7,151)
                                                   ==========   ==========   =======    ========
DECEMBER 31, 1997
U.S. treasury securities and obligations of U.S.
  government agencies and authorities............  $    6,258   $    6,298   $     4    $    (44)
Obligations of states and political subdivisions,
  special revenue and nonguaranteed..............      29,330       29,308       160        (138)
Debt securities issued by foreign governments....      92,563       92,722       188        (347)
Corporate securities.............................   1,861,655    1,846,588    24,733      (9,666)
Mortgage and asset-backed securities.............   1,678,837    1,669,159    10,035        (357)
                                                   ----------   ----------   -------    --------
       Total fixed maturities....................  $3,668,643   $3,644,075   $35,120    $(10,552)
                                                   ==========   ==========   =======    ========
</TABLE>
    
 
                                       79
<PAGE>   84
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
    
   
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1998, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
    
 
   
<TABLE>
<CAPTION>
                                                                 CARRYING     AMORTIZED
                                                                  VALUE          COST
                       (in thousands)                            --------     ---------
<S>                                                             <C>           <C>
One year or less............................................    $   44,816    $   44,745
Over one year through five years............................       814,646       802,147
Over five years through ten years...........................       891,767       866,613
Over ten years..............................................       261,968       254,753
Securities not due at a single maturity date, primarily
  mortgage and asset-backed securities(1)...................     1,469,623     1,453,277
                                                                ----------    ----------
       Total fixed maturities...............................    $3,482,820    $3,421,535
                                                                ==========    ==========
</TABLE>
    
 
---------------
   
(1) Weighted average maturity of 4.0 years.
    
 
   
Proceeds from sales of investments in fixed maturities prior to maturity were
$882.6 million, $633.9 million and $892.0 million during 1998, 1997 and 1996,
respectively. Gross gains of $10.1 million, $3.1 million and $9.9 million and
gross losses of $8.0 million, $13.7 million and $16.2 million were realized on
sales and write-downs of fixed maturities in 1998, 1997 and 1996, respectively.
    
 
   
At December 31, 1998, the Company had 12 separate asset-backed securities
included in fixed maturity investments from trusts formed to collateralize
assets underwritten by Green Tree Financial Corporation, which in aggregate
amounted to $97.7 million. No other individual investments exceeded ten percent
of stockholder's equity at December 31, 1998.
    
 
   
At December 31, 1998, securities carried at approximately $6.4 million were on
deposit with governmental agencies as required by law.
    
 
   
Upon default or indication of potential default by an issuer of fixed maturity
securities, the issue(s) of such issuer would be placed on nonaccrual status
and, since declines in fair value would no longer be considered by the Company
to be temporary, would be analyzed for possible write-down. Any such issue would
be written down to its net realizable value during the fiscal quarter in which
the impairment was determined to have become other than temporary. Thereafter,
each issue on nonaccrual status is regularly reviewed, and additional
write-downs may be taken in light of later developments.
    
 
   
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
    
 
                                       80
<PAGE>   85
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
    
   
The Company's $164.4 million real estate portfolio at December 31, 1998 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1998 and 1997, total impaired real estate-related
loans were as follows:
    
 
   
<TABLE>
<CAPTION>
                                                                DECEMBER 31     DECEMBER 31
                                                                    1998            1997
                       (in millions)                            -----------     -----------
<S>                                                             <C>             <C>
Impaired loans without reserves--gross......................       $83.9           $39.3
Impaired loans with reserves--gross.........................        21.5             2.2
                                                                   -----           -----
       Total gross impaired loans...........................       105.4            41.5
Reserves related to impaired loans..........................       (18.5)           (2.1)
                                                                   -----           -----
       Net impaired loans...................................       $86.9           $39.4
                                                                   =====           =====
</TABLE>
    
 
   
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. The Company had an average balance of $54.6 million
and $45.2 million in impaired loans for 1998 and 1997, respectively. Cash
payments received on impaired loans are generally applied to reduce the
outstanding loan balance.
    
 
   
At December 31, 1998 and 1997, loans on nonaccrual status, before reserves and
write-downs, amounted to $37.4 million and $47.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
    
 
   
The sources of net investment income were as follows:
    
 
   
<TABLE>
<CAPTION>
                                                              1998           1997           1996
                     (in thousands)                         --------       --------       --------
<S>                                                         <C>            <C>            <C>
Interest and dividends on fixed maturities..............    $232,707       $250,170       $250,683
Dividends on equity securities..........................       2,143          2,123            646
Income from short-term investments......................       5,391          4,128          9,130
Income from mortgage loans..............................      14,964         16,283         20,257
Income from policy loans................................      21,096         20,549         20,700
Income from other real estate-related investments.......         352          6,631          4,917
Income from other loans and investments.................       2,223          2,045          2,480
                                                            --------       --------       --------
       Total investment income..........................     278,876        301,929        308,813
Investment expense......................................      (5,364)        (5,734)        (9,125)
                                                            --------       --------       --------
       Net investment income............................    $273,512       $296,195       $299,688
                                                            ========       ========       ========
</TABLE>
    
 
                                       81
<PAGE>   86
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
    
   
Net realized investment gains (losses) for the years ended December 31, 1998,
1997 and 1996, were as follows:
    
 
   
<TABLE>
<CAPTION>
                                                                    REALIZED GAINS (LOSSES)
                                                             -------------------------------------
                                                               1998           1997          1996
                     (in thousands)                          --------       --------       -------
<S>                                                          <C>            <C>            <C>
Real estate-related......................................    $ 41,362       $ 19,758       $17,462
Fixed maturities.........................................       2,158        (10,656)       (6,344)
Trading account securities--gross gains on transfer......       3,254          --            --
Trading account securities--gross losses on transfer.....        (417)         --            --
Trading account securities--holding losses...............        (151)         --            --
Equity securities........................................       5,496            914         --
Other....................................................         166            530         2,484
                                                             --------       --------       -------
  Realized investment gains before income tax expense....      51,868         10,546        13,602
Income tax expense.......................................     (18,154)        (3,691)       (4,761)
                                                             --------       --------       -------
  Net realized investment gains..........................    $ 33,714       $  6,855       $ 8,841
                                                             ========       ========       =======
</TABLE>
    
 
   
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity and other securities--the
difference between fair value and cost. The change in net unrealized investment
gains (losses) by class of investment for the years ended December 31, 1998,
1997 and 1996 were as follows:
    
 
   
<TABLE>
<CAPTION>
                                                               CHANGE IN UNREALIZED GAINS (LOSSES)
                                                            -----------------------------------------
                                                            DECEMBER 31    DECEMBER 31    DECEMBER 31
                                                                1998           1997          1996
                      (in thousands)                        ------------   ------------   -----------
<S>                                                         <C>            <C>            <C>
Fixed maturities..........................................    $ 36,717       $ 87,787      $(63,219)
Equity and other securities...............................      (1,074)          (103)        1,256
Adjustment to deferred insurance acquisition costs........      (2,399)        (2,325)        1,307
Adjustment to value of business acquired..................      (1,954)       (26,209)       20,947
                                                              --------       --------      --------
  Unrealized gain (loss) before income tax expense
     (benefit)............................................      31,290         59,150       (39,709)
Income tax expense (benefit)..............................      10,952           (985)        7,789
                                                              --------       --------      --------
       Net unrealized gain (loss) on investments..........    $ 20,338       $ 60,135      $(47,498)
                                                              ========       ========      ========
</TABLE>
    
 
   
(4) UNCONSOLIDATED INVESTEES
    
 
   
At December 31, 1998 and 1997 the Company, along with other Kemper subsidiaries,
directly held partnership interests in a number of real estate joint ventures.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more
    
 
                                       82
<PAGE>   87
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(4) UNCONSOLIDATED INVESTEES (CONTINUED)
    
   
than 50 percent in the aggregate, and in any event, major decisions of the
partnership must be made jointly by all partners.
    
 
   
As of December 31, 1998 and 1997, the Company's net equity investment in
unconsolidated investees amounted to $1.2 million and $19.3 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $241 thousand, $835 thousand and $223 thousand in 1998,
1997 and 1996, respectively.
    
 
   
(5) CONCENTRATION OF CREDIT RISK
    
 
   
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
    
 
   
Approximately 28.0 percent of the Company's investment-grade fixed maturities at
December 31, 1998 were mortgage-backed securities, down from 35.1 percent at
December 31, 1997, due to sales and paydowns during 1998. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
    
 
   
Approximately 15.4 percent and 10.8 percent of the Company's investment-grade
fixed maturities at December 31, 1998 and 1997, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (21.9%), auto loans
(8.2%), manufactured housing loans (14.8%), equipment loans (5.2%), and
commercial mortgage backed securities (22.1%).
    
 
   
The Company's real estate portfolio is distributed by geographic location and
property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 1998 was as follows: California (31.5%), Hawaii
(16.2%), Washington (9.9%) and Colorado (9.4%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1998 was as
follows: hotels (39.9%), land (30.9%) and residential (15.5%).
    
 
   
Undeveloped land represented approximately 30.9 percent of the Company's real
estate portfolio at December 31, 1998. To maximize the value of certain land and
other projects, additional development has been proceeding or has been planned.
Such development of existing projects would continue to require funding, either
from the Company or third parties. In the present real estate markets,
third-party financing can require credit enhancing arrangements (e.g., standby
financing arrangements and loan commitments) from the Company. The values of
development projects are dependent on a number of factors, including Kemper's
and the Company's plans with respect thereto, obtaining necessary construction
and zoning permits and market demand for the permitted use of the property.
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.
    
 
                                       83
<PAGE>   88
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
    
   
Approximately half of the Company's real estate mortgage loans are on properties
or projects where the Company, Kemper, or their affiliates have taken ownership
positions in joint ventures with a small number of partners.
    
 
   
At December 31, 1998, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $64.5 million, or
39.3 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1998,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
    
 
   
At December 31, 1998, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliate, constituted approximately $51.6 million, or
31.4 percent, of the Company's real estate portfolio. Kemper's interest is 75
percent at December 31, 1998. At December 31, 1998, MLP-related commitments
accounted for approximately $6.1 million of the Company's off-balance-sheet
legal commitments.
    
 
   
The remaining significant real estate-related investments amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, the Company has placed these real estate-related investments on
nonaccrual status as of December 31, 1996. The Company is currently pursuing the
zoning of all remaining unzoned properties, as well as pursuing steps to sell
all remaining zoned properties. However, due to the state of Hawaii's economy,
which has lagged behind the economic expansion of most of the rest of the United
States, the Company anticipates that it could be several additional years until
the Company completely disposes of all of its investments in Hawaii.
    
 
   
At December 31, 1998, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold. However, the Company continues to have Prime
Group-related commitments, which accounted for $25.7 million of the Company's
off-balance-sheet legal commitments at December 31, 1998.
    
 
   
(6) INCOME TAXES
    
 
   
Income tax expense (benefit) was as follows for the years ended December 31,
1998, 1997 and 1996:
    
 
   
<TABLE>
<CAPTION>
                                                         1998          1997          1996
                   (in thousands)                      --------      --------      --------
<S>                                                    <C>           <C>           <C>
Current..............................................  $ 52,274      $130,662      $ 26,300
Deferred.............................................   (12,470)      (99,370)         (897)
                                                       --------      --------      --------
          Total......................................  $ 39,804      $ 31,292      $ 25,403
                                                       ========      ========      ========
</TABLE>
    
 
                                       84
<PAGE>   89
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(6) INCOME TAXES (CONTINUED)
    
   
Additionally, the deferred income tax expense (benefit) related to items
included in other comprehensive income was as follows for the years ended
December 31, 1998, 1997 and 1996:
    
 
   
<TABLE>
<CAPTION>
                                                            1998         1997         1996
                     (in thousands)                        -------      -------      ------
<S>                                                        <C>          <C>          <C>
Unrealized gains and losses on investments...............  $12,475      $ 9,002      $   --
Value of business acquired...............................     (684)      (9,173)      7,331
Deferred insurance acquisition costs.....................     (840)        (814)        457
                                                           -------      -------      ------
          Total..........................................  $10,952      $  (985)     $7,789
                                                           =======      =======      ======
</TABLE>
    
 
   
The actual income tax expense for 1998, 1997 and 1996 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 1998, 1997, and 1996 to income before income tax expense.
    
 
   
<TABLE>
<CAPTION>
                                                           1998         1997         1996
                     (in thousands)                       -------      -------      -------
<S>                                                       <C>          <C>          <C>
Computed expected tax expense...........................  $36,734      $24,503      $20,938
Difference between "expected" and actual tax expense:
  State taxes...........................................     (434)       1,801          913
  Amortization of goodwill..............................    4,460        5,353        3,568
  Dividend received deduction...........................     (540)       --           --
  Foreign tax credit....................................     (250)        (278)       --
  Other, net............................................     (166)         (87)         (16)
                                                          -------      -------      -------
          Total actual tax expense......................  $39,804      $31,292      $25,403
                                                          =======      =======      =======
</TABLE>
    
 
   
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.
The valuation allowance is subject to future adjustments based upon, among other
items, the Company's estimates of future operating earnings and capital gains.
    
 
   
The Company has established a valuation allowance to reduce the deferred federal
tax asset related to real estate and other investments to the amount that, based
upon available evidence, is, in management's judgment, more likely than not, to
be realized. Any reversals of the valuation allowance are contingent upon the
recognition of future capital gains in the Company's federal income tax return
or a change in circumstances which causes the recognition of the benefits to
become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred federal tax asset or liability from
unrealized gains or losses on investments.
    
 
                                       85
<PAGE>   90
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(6) INCOME TAXES (CONTINUED)
    
   
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred federal tax assets or liabilities were as follows:
    
 
   
<TABLE>
<CAPTION>
                                                         DECEMBER 31    DECEMBER 31     DECEMBER 31
                                                            1998            1997            1996
                    (in thousands)                       -----------    ------------    ------------
<S>                                                      <C>            <C>             <C>
Deferred federal tax assets:
  Deferred insurance acquisition costs.................   $ 86,332        $ 75,522        $  4,520
  Unrealized losses on investments.....................     --              --              16,624
  Life policy reserves.................................     27,240          43,337          46,452
  Unearned revenue.....................................     42,598          37,243          --
  Real estate-related..................................     13,944          13,400          20,642
  Other investment-related.............................      5,770           3,298           5,409
  Other................................................      4,923           4,371           3,639
                                                          --------        --------        --------
     Total deferred federal tax assets.................    180,807         177,171          97,286
  Valuation allowance..................................    (15,201)        (15,201)        (31,825)
                                                          --------        --------        --------
     Total deferred federal tax assets after valuation
       allowance.......................................    165,606         161,970          65,461
                                                          --------        --------        --------
Deferred federal tax liabilities:
  Value of business acquired...........................     41,598          48,469          66,373
  Deferred insurance acquisition costs.................     32,040          20,811           9,384
  Depreciation and amortization........................     19,111          20,201          15,473
  Other investment-related.............................     14,337          18,774          28,855
  Unrealized gains on investments......................     21,477           9,002          --
  Other................................................      1,984           4,720           5,738
                                                          --------        --------        --------
     Total deferred federal tax liabilities............    130,547         121,977         125,823
                                                          --------        --------        --------
Net deferred federal tax assets (liabilities)..........   $ 35,059        $ 39,993        $(60,362)
                                                          ========        ========        ========
</TABLE>
    
 
   
The net deferred tax assets relate primarily to unearned revenue and the tax on
deferred insurance acquisition costs ("DAC Tax") associated with $1.5 billion
and $2.7 billion of new and renewal sales in 1998 and 1997, respectively from a
non-registered individual and group variable bank-owned life insurance contract
("BOLI"). Management believes that it is more likely than not that the results
of future operations will generate sufficient taxable income over the ten year
amortization period of the unearned revenue and DAC Tax to realize such deferred
tax assets.
    
 
   
The tax returns through the year 1993 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1994 through 1996 are currently under
examination by the IRS.
    
 
   
(7) RELATED-PARTY TRANSACTIONS
    
 
   
The Company received capital contributions from Kemper of $4.3 million, $45.0
million and $18.4 million during 1998, 1997 and 1996, respectively. The Company
paid cash dividends of $95.0 million and
    
 
                                       86
<PAGE>   91
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
    
   
$29.3 million to Kemper during 1998 and 1997, respectively. The Company did not
pay any cash dividends to Kemper during 1996.
    
 
   
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, 1998 and 1997, joint venture mortgage loans
totaled $65.8 million and $72.7 million, respectively, and during 1998, 1997 and
1996, the Company earned interest income on these joint venture loans of $6.8
million, $7.5 million and $9.5 million, respectively.
    
 
   
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Scudder Kemper Investments, Inc. ("SKI") an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), an SKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1998,
1997 and 1996, expenses allocated to the Company from SKI and KSvC amounted to
$43 thousand, $114 thousand and $1.7 million, respectively. The Company also
paid to SKI investment management fees of $3.1 million, $3.5 million and $3.6
million during 1998, 1997 and 1996, respectively. In addition, expenses
allocated to the Company from FKLA during 1998, 1997 and 1996 amounted to $35.5
million, $30.0 million and $10.5 million, respectively. The Company also paid to
Kemper real estate subsidiaries $1.5 million, $2.2 million and $1.8 million in
1998, 1997 and 1996, respectively, related to the management of the Company's
real estate portfolio.
    
 
   
(8) REINSURANCE
    
 
   
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
    
 
   
As of December 31, 1998 and 1997, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $344.8 million
and $382.6 million, respectively.
    
 
   
In December 1996, the Company assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, the Company recorded premiums and reserves of
approximately $7.3 million. The difference between the cash transferred, which
represents the statutory reserves of the business assumed, and the reserves
recorded under generally accepted accounting principles ("GAAP"), of
approximately $18.4 million, was deemed to be a capital contribution from Kemper
and was recorded as additional paid-in-capital during 1996. As of the date of
this transaction, no deferred tax impact was recorded on the difference between
the statutory and GAAP reserves. This deferred tax impact of $6.5 million was
recorded in 1998 as a reduction to the original capital
    
 
                                       87
<PAGE>   92
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(8) REINSURANCE (CONTINUED)
    
   
contribution. Premiums assumed during 1998 under the terms of the treaty
amounted to $21.6 million and the face amount which remained outstanding at
December 31, 1998 amounted to $11.7 billion.
    
 
   
Effective January 1, 1997, the Company ceded 90 percent of all new term life
insurance premiums to outside reinsurers. Term life reserves ceded to outside
reinsurers on the Company's direct business amounted to approximately $293
thousand and $139 thousand as of December 31, 1998 and 1997, respectively.
    
 
   
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC
Life"), formerly EPICENTRE Reinsurance (Bermuda) Limited. Under the terms of
this agreement, the Company ceded, on a yearly renewable term basis, ninety
percent of the net amount at risk (death benefit payable to the insured less the
insured's separate account cash surrender value) related to the new BOLI product
developed in 1997, which is held in the Company's separate accounts. During
1997, the Company issued $59.3 billion (face amount) of new BOLI business and
ceded $51.1 billion (face amount) to ZC Life under the terms of the treaty.
During 1997, the Company also ceded $24.3 million of separate account fees (cost
of insurance charges) to ZC Life. The Company has also withheld approximately
$23.4 million of such funds due to ZC Life under the terms of the reinsurance
agreement as a component of benefits and funds payable in the accompanying
consolidated balance sheet as of December 31, 1997.
    
 
   
During 1998, the Company modified the reinsurance agreement to increase the
reinsurance from ninety percent to one hundred percent. During 1998, the Company
issued $6.9 billion (face amount) of new BOLI business and ceded $11.1 billion
(face amount) to ZC Life under the terms of the modified treaty. During 1998,
the Company also ceded $175.5 million of separate account fees (cost of
insurance charges) to ZC Life. The Company has also withheld approximately
$170.9 million of such funds due to ZC Life under the terms of the reinsurance
agreement as a component of benefits and funds payable in the accompanying
consolidated balance sheet as of December 31, 1998.
    
 
   
KILICO has a large and growing funds withheld account ("FWA") supporting reserve
credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA is now marked-to-market based upon the
Total Return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, the Company recorded a $2.5 million increase to
the FWA related to this mark-to-market. To properly match revenue and expenses,
the Company has placed assets supporting the FWA in a segmented portion of its
General Account. This portfolio is classified as "trading" under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, the Company recorded a realized capital gain of $2.8 million upon
transfer of these assets from "available for sale" to the trading portfolio as
required by FAS 115. In addition, the Company recorded realized capital losses
of $151 thousand related to the changes in fair value of this portfolio during
1998. The fair value of this portfolio was $101.8 million at December 31, 1998,
and the amortized cost was $99.1 million. The Company periodically purchases
assets into this segmented portfolio to support changes in the FWA.
    
 
                                       88
<PAGE>   93
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
    
 
   
FKLA sponsors a welfare plan that provides medical and life insurance benefits
to its retired and active employees and the Company is allocated a portion of
the costs of providing such benefits. The Company is self insured with respect
to medical benefits, and the plan is not funded except with respect to certain
disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
    
 
   
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $2.0 million and $1.9 million at December 31, 1998 and 1997,
respectively.
    
 
   
The discount rate used in determining the allocated postretirement benefit
obligation was 7.0 percent and 7.25 percent for 1998 and 1997, respectively. The
assumed health care trend rate used was based on projected experience for 1998,
8.0 percent for 1999, gradually declining to 6.4 percent by the year 2003 and
gradually declining thereafter.
    
 
   
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1998 and 1997 by $312 thousand and $242 thousand, respectively.
    
 
   
(10) COMMITMENTS AND CONTINGENT LIABILITIES
    
 
   
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
    
 
   
Although neither the Company nor its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of, or lending to, real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
    
 
                                       89
<PAGE>   94
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
    
 
   
At December 31, 1998, the Company had future legal loan commitments and stand-by
financing agreements totaling $64.4 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be collateralized by assets of the joint ventures,
including first mortgage liens on the real estate. The Company's criteria in
making these arrangements are the same as for its mortgage loans and other real
estate investments. These commitments are included in the Company's analysis of
real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
    
 
   
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
    
 
   
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. Fair value estimates for financial instruments not
carried at fair value are generally determined using discounted cash flow models
and assumptions that are based on judgments regarding current and future
economic conditions and the risk characteristics of the investments. Although
fair value estimates are calculated using assumptions that management believes
are appropriate, changes in assumptions could significantly affect the estimates
and such estimates should be used with care.
    
 
   
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
    
 
   
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
    
 
   
FIXED MATURITIES AND EQUITY SECURITIES: Fair values were determined by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of fair values obtained from yield data relating to
instruments or securities with similar characteristics, or fair value as
determined in good faith by the Company's portfolio manager, SKI.
    
 
   
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values.
    
 
   
MORTGAGE LOANS AND OTHER REAL ESTATE-RELATED INVESTMENTS: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty in estimating the fair value of real estate due to the lack
of a liquid quotable market.
    
 
                                       90
<PAGE>   95
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
   
OTHER LOANS AND INVESTMENTS: The carrying amounts reported in the consolidated
balance sheets for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
    
 
   
LIFE POLICY BENEFITS: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1998 and 1997 to be 4.75 percent and 5.25 percent,
respectively, while the assumed average market crediting rate was 5.0 percent
and 6.0 percent in 1998 and 1997, respectively.
    
 
   
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997 were as follows:
    
 
   
<TABLE>
<CAPTION>
                                                  DECEMBER 31, 1998             DECEMBER 31, 1997
                                               ------------------------      ------------------------
                                                CARRYING        FAIR          CARRYING        FAIR
                                                 VALUE         VALUE           VALUE         VALUE
              (in thousands)                   ----------    ----------      ----------    ----------
<S>                                            <C>           <C>             <C>           <C>
Financial instruments recorded as assets:
  Fixed maturities.........................    $3,482,820    $3,482,820      $3,668,643    $3,668,643
  Trading account securities...............       101,781       101,781          --            --
  Cash and short-term investments..........        71,820        71,820         259,925       259,925
  Mortgage loans and other real
     estate-related assets.................       164,375       164,375         220,046       220,046
  Policy loans.............................       271,540       271,540         282,439       282,439
  Equity securities........................        66,854        66,854          24,839        24,839
  Other invested assets....................        23,645        27,620          20,820        24,404
Financial instruments recorded as
  liabilities:
  Life policy benefits, excluding term life
     reserves..............................     3,551,050     3,657,510       3,846,023     4,050,852
  Funds withheld account...................       170,920       170,920          23,420        23,420
</TABLE>
    
 
   
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
    
 
   
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 1999 is $64.9 million. The
Company paid cash dividends of $95.0 million and $29.3 million to Kemper during
1998 and 1997, respectively. The Company paid no cash dividends in 1996.
    
 
                                       91
<PAGE>   96
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS (CONTINUED)
    
   
The Company's net income and capital and surplus as determined in accordance
with statutory accounting principles were as follows:
    
 
   
<TABLE>
<CAPTION>
                                                                 1998          1997          1996
                      (in thousands)                           --------      --------      --------
<S>                                                            <C>           <C>           <C>
Net income.................................................    $ 64,871      $ 58,372      $ 37,287
                                                               ========      ========      ========
Statutory capital and surplus..............................    $455,213      $476,924      $411,837
                                                               ========      ========      ========
</TABLE>
    
 
                                       92
<PAGE>   97
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
    
 
   
The following table sets forth the Company's unaudited quarterly financial
information:
    
 
   
(in thousands)
    
 
   
<TABLE>
<CAPTION>
                 QUARTER ENDED                    MARCH 31   JUNE 30   SEPTEMBER 30   DECEMBER 31
                 -------------                    --------   -------   ------------   -----------
<S>                                               <C>        <C>       <C>            <C>
1998 OPERATING SUMMARY
  Net investment income.........................  $70,551    $68,467     $ 66,892      $ 67,602
  Realized investment gains.....................    1,854     15,673        8,951        25,390
  Premium income................................    5,203      5,941        5,278         5,924
  Separate account fees and other income........   20,418     19,922       17,631        14,042
                                                  -------    -------     --------      --------
          Total revenue.........................   98,026    110,003       98,752       112,958
                                                  -------    -------     --------      --------
  Interest credited and benefits to
     policyholders..............................   57,930     57,939       54,251        34,815
  Commissions, taxes, licenses and fees.........   13,885     13,922       12,282        29,251
  Operating expenses............................   10,094     12,157       10,528        11,794
  Net deferral of insurance acquisition costs...   (7,973)   (11,983)      (9,669)       (4,858)
  Amortization of value of business acquired....    4,427      7,121        6,359          (230)
  Amortization of goodwill......................    3,186      3,186        3,186         3,186
                                                  -------    -------     --------      --------
          Total benefits and expenses...........   81,549     82,342       76,937        73,958
                                                  -------    -------     --------      --------
  Income before income tax expense..............   16,477     27,661       21,815        39,000
  Income tax expense............................    7,247     11,774        8,828        11,955
                                                  -------    -------     --------      --------
          Net income............................  $ 9,230    $15,887     $ 12,987      $ 27,045
                                                  =======    =======     ========      ========
1997 OPERATING SUMMARY
  Net investment income.........................  $74,249    $74,050     $ 72,950      $ 74,946
  Realized investment gains (losses)............      889      8,161       (3,032)        4,528
  Premium income................................    5,008      4,121        3,938         9,172
  Separate account fees and other income........    8,909     12,961       12,215        62,415(1)
                                                  -------    -------     --------      --------
          Total revenue.........................   89,055     99,293       86,071       151,061
                                                  -------    -------     --------      --------
  Interest credited and benefits to
     policyholders..............................   57,859     56,643       57,965        55,687
  Commissions, taxes, licenses and fees.........    8,023      9,475        8,389        59,323(1)
  Operating expenses............................    7,175      8,780       10,014        10,868
  Net deferral of insurance acquisition costs...   (7,216)    (6,877)      (7,471)      (13,409)
  Amortization of value of business acquired....    4,821      6,991        6,743         6,393
  Amortization of goodwill......................    2,547      2,552        2,549         7,647(2)
                                                  -------    -------     --------      --------
          Total benefits and expenses...........   73,209     77,564       78,189       126,509
                                                  -------    -------     --------      --------
  Income before income tax expense..............   15,846     21,729        7,882        24,552
  Income tax expense............................    5,678      8,723        3,778        13,113
                                                  -------    -------     --------      --------
          Net income............................  $10,168    $13,006     $  4,104      $ 11,439
                                                  =======    =======     ========      ========
</TABLE>
    
 
---------------
   
Notes:
    
 
   
(1) Reflects premium tax expense loads received and premium taxes incurred of
    $49.1 million related to new BOLI sales of $2.6 billion in the fourth
    quarter of 1997.
    
 
   
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
    years.
    
 
                                       93
<PAGE>   98
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
(15) OPERATING SEGMENTS AND RELATED INFORMATION
    
 
   
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for how
to report information about operating segments. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS No. 131 as of December 31, 1998 and the
impact of implementation did not affect the Company's consolidated financial
position, results of operations or cash flows. In the initial year of adoption,
SFAS No. 131 requires comparative information for earlier years to be restated,
unless impracticable to do so.
    
 
   
In connection with the acquisition by Zurich, the Company, FKLA, ZLICA, and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, began to operate under the trade name Zurich Kemper Life. For
purposes of this operating segment disclosure, Zurich Kemper Life will also
include the operations of Zurich Direct, Inc., an affiliated direct marketing
life insurance agency and excludes FLA, as it is owned by its policyholders.
    
 
   
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The SBU
concept employed by ZFS has each SBU concentrate on a specific customer market.
The SBU is the focal point of Zurich Kemper Life, because it is at the SBU level
that Zurich Kemper Life can clearly identify customer segments and then work to
understand and satisfy the needs of each customer. The contributions of Zurich
Kemper Life's SBU's to consolidated revenues, operating results and certain
balance sheet data pertaining thereto, are shown in the following tables on the
basis of generally accepted accounting principles. Zurich Kemper Life's SBU's
were formed in 1996, subsequent to the acquisition by Zurich, however, financial
information was not produced by SBU until 1997. Therefore, Zurich Kemper Life
has not provided segment information for 1996, as it would be impracticable to
do so.
    
 
   
Zurich Kemper Life is segregated into the Agency, Financial, Group Retirement
and Direct SBU's. The SBU's are not managed at the legal entity level, but
rather at the Zurich Kemper Life level. Zurich Kemper Life's SBU's cross legal
entity lines, as certain similar products are sold by more than one legal
entity. The vast majority of the Company's business is derived from the
Financial and Group Retirement SBU's.
    
 
   
Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 1998 and 1997, Zurich Kemper Life did not derive net revenue from
one customer that exceeded 10 percent of the total revenue of Zurich Kemper
Life.
    
 
   
The principal products and markets of Zurich Kemper Life's SBU's are as follows:
    
 
   
AGENCY: The Agency SBU develops low cost term and universal life insurance, as
well as fixed annuities, to market through independent agencies and national
marketing organizations.
    
 
   
FINANCIAL: The Financial SBU focuses on a wide range of products that provide
for the accumulation, distribution and transfer of wealth and primarily includes
variable and fixed annuities, variable universal life and bank-owned life
insurance. These products are distributed to consumers through financial
intermediaries such as banks, brokerage firms and independent financial
planners.
    
 
   
GROUP RETIREMENT: The Group Retirement SBU has a sharp focus on its target
customer. This SBU markets variable annuities to K-12 schoolteachers,
administrators, and healthcare workers, along with college
    
 
                                       94
<PAGE>   99
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
professors and certain employees of selected non-profit organizations. This
target market is eligible for what the IRS designates as retirement-oriented
savings or investment plans that qualify for special tax treatment.
    
 
   
DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
    
 
   
Summarized financial information for ZKL's SBU's are as follows:
    
 
   
As of and for the period ending December 31, 1998:
    
   
(in thousands)
    
 
   
<TABLE>
<CAPTION>
                                                                 GROUP
                                       AGENCY     FINANCIAL    RETIREMENT    DIRECT       TOTAL
         INCOME STATEMENT            ----------   ----------   ----------   --------   -----------
<S>                                  <C>          <C>          <C>          <C>        <C>
REVENUE
  Premium income...................  $  160,067   $       56   $       --   $  5,583   $   165,706
  Net investment income............     141,171      180,721      100,695        271       422,858
  Realized investment gains........      20,335       33,691       15,659         30        69,715
  Fees and other income............      80,831       40,421       31,074     23,581       175,907
                                     ----------   ----------   ----------   --------   -----------
       Total revenue...............     402,404      254,889      147,428     29,465       834,186
                                     ----------   ----------   ----------   --------   -----------
BENEFITS AND EXPENSES
  Policyholder benefits............     243,793      117,742       73,844      2,110       437,489
  Intangible asset amortization....      58,390       15,669       15,703         --        89,762
  Net deferral of insurance
     acquisition costs.............     (55,569)      (9,444)     (22,964)   (22,765)     (110,742)
  Commissions and taxes, licenses
     and fees......................      29,539       43,919       22,227     11,707       107,392
  Operating expenses...............      61,659       24,924       20,279     35,593       142,455
                                     ----------   ----------   ----------   --------   -----------
       Total benefits and
          expenses.................     337,812      192,810      109,089     26,645       666,356
                                     ----------   ----------   ----------   --------   -----------
Income before income tax expense...      64,592       62,079       38,339      2,820       167,830
Income tax expense.................      26,774       24,340       14,794      1,001        66,909
                                     ----------   ----------   ----------   --------   -----------
       Net income..................  $   37,818   $   37,739   $   23,545   $  1,819   $   100,921
                                     ==========   ==========   ==========   ========   ===========
BALANCE SHEET
  Total assets.....................  $3,194,530   $8,232,927   $4,172,828   $ 46,254   $15,646,539
                                     ==========   ==========   ==========   ========   ===========
</TABLE>
    
 
                                       95
<PAGE>   100
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
<TABLE>
<CAPTION>
                                                                          NET
                                                            REVENUE      INCOME      ASSETS
                                                          -----------   --------   -----------
<S>                             <C>          <C>          <C>           <C>        <C>
Total revenue, net income and assets, respectively,
from above:............................................   $   834,186   $100,921   $15,646,539
                                                          -----------   --------   -----------
Less:
  Revenue, net income and assets of FKLA...............       336,841     35,953     2,986,381
  Revenue, net loss and assets of ZLICA................        54,058     (1,066)      416,115
  Revenue, net income and assets Zurich Direct.........        23,548        885         4,322
                                                          -----------   --------   -----------
  Totals per the Company's consolidated financial
     statements........................................   $   419,739   $ 65,149   $12,239,721
                                                          ===========   ========   ===========
</TABLE>
    
 
   
As of and for the period ending December 31, 1997:
    
   
(in thousands)
    
 
   
<TABLE>
<CAPTION>
                                                             GROUP
                                   AGENCY     FINANCIAL    RETIREMENT    DIRECT       TOTAL
       INCOME STATEMENT          ----------   ----------   ----------   --------   -----------
<S>                              <C>          <C>          <C>          <C>        <C>
REVENUE
  Premium income...............  $  167,439   $       --   $       --   $  4,249   $   171,688
  Net investment income........     155,885      212,767       91,664        455       460,771
  Realized investment gains....       2,503        7,744        2,692         50        12,989
  Fees and other income........      78,668       73,823       23,663      8,007       184,161
                                 ----------   ----------   ----------   --------   -----------
       Total revenue...........     404,495      294,334      118,019     12,761       829,609
                                 ----------   ----------   ----------   --------   -----------
BENEFITS AND EXPENSES
  Policyholder benefits........     247,878      153,327       60,061      2,234       463,500
  Intangible asset
     amortization..............      58,534       25,593       15,589         --        99,716
  Net deferral of insurance
     acquisition costs.........     (50,328)     (18,222)     (13,033)    (5,242)      (86,825)
  Commissions and taxes,
     licenses and fees.........      39,477       66,552       16,668      3,518       126,215
  Operating expenses...........      55,859       20,282       14,320     19,472       109,933
                                 ----------   ----------   ----------   --------   -----------
       Total benefits and
          expenses.............     361,420      247,532       93,605     19,982       712,539
                                 ----------   ----------   ----------   --------   -----------
Income (loss) before income tax
  expense (benefit)............      53,075       46,802       24,414     (7,221)      117,070
Income tax expense (benefit)...      25,554       21,144       10,545     (2,528)       54,715
                                 ----------   ----------   ----------   --------   -----------
       Net income (loss).......  $   27,521   $   25,658   $   13,869   $ (4,693)  $    62,355
                                 ==========   ==========   ==========   ========   ===========
BALANCE SHEET
  Total assets.................  $2,877,854   $7,416,791   $3,759,173   $ 41,669   $14,095,487
                                 ==========   ==========   ==========   ========   ===========
</TABLE>
    
 
                                       96
<PAGE>   101
   
            KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
    
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
   
<TABLE>
<CAPTION>
                                                                          NET
                                                            REVENUE      INCOME      ASSETS
                                                          -----------   --------   -----------
<S>                                                       <C>           <C>        <C>
Total revenue, net income and assets, respectively,
from above:............................................   $   829,609   $ 62,355   $14,095,487
Less:
  Revenue, net income and assets of FKLA...............       338,854     24,740     3,105,396
  Revenue, net income and assets of ZLICA..............        57,233      2,193       398,786
  Revenue, net loss and assets of Zurich Direct........         8,042     (3,295)        1,655
                                                          -----------   --------   -----------
       Totals per the Company's consolidated financial
          statements...................................   $   425,480   $ 38,717   $10,589,650
                                                          ===========   ========   ===========
</TABLE>
    
 
                                       97
<PAGE>   102
 
APPENDIX A
 
                   ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
 
<TABLE>
<S>                         <C>
Purchase Payment:           $40,000
Guarantee Period:           5 Years
Guaranteed Interest Rate:   5% Annual Effective Rate
</TABLE>
 
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Certificate upon a withdrawal. The
5% assumed Guaranteed Interest Rate is the rate required to be used in the
"Summary of Expenses." In these examples, the withdrawal occurs one year after
the Date of Issue. The Market Value Adjustment operates in a similar manner for
transfers. No Withdrawal Charge applies to transfers.
 
The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
 
The Market Value Adjustment will be based on the rate KILICO is then crediting
(at the time of the withdrawal) on new Certificates with the same Guarantee
Period as the time remaining in your Guarantee Period rounded to the next higher
number of complete years. One year after the Purchase Payment there would have
been four years remaining in your Guarantee Period. These examples also show the
Withdrawal Charge (if any) which would be calculated separately after the Market
Value Adjustment.
 
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT
 
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment and KILICO is then crediting 6.5%
for a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
 
                             (1 + .05)              4
 -.0726961*  =  [        ----------------- ]              -1
                         (1 + .065 + .005)
 
The Market Value Adjustment is a reduction of $3,053.24 from the Guarantee
Period Value:
 
                       -3,053.24 = -.0726961 X 42,000.00
 
The Market Adjusted Value would be:
 
                      $38,946.76 = $42,000.00 - $3,053.24
 
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 15% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
 
                       $1,986.29 = $38,946.76 X .85 X .06
 
Thus, the amount payable on a full withdrawal would be:
 
                      $36,960.48 = $38,946.76 - $1,986.29
---------------
* Actual calculation utilizes 10 decimal places.
 
                                       98
<PAGE>   103
 
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
 
                      -$1,526.62 = -.0726961 X $21,000.00
 
The Market Adjusted Value would be:
 
                      $19,473.38 = $21,000.00 - $1,526.62
 
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
 
                $819.68 = ($19,473.38 - .15 X $38,946.76) X .06
 
Thus, the amount payable on this partial withdrawal would be:
 
                       $18,653.70 = $19,473.38 - $819.68
 
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
 
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and KILICO is then crediting 4% for a four-year Guarantee Period. Upon a
full withdrawal, the market value adjustment factor would be:
 
                          (1 + .05)              4
+.0192766  =  [        ---------------- ]              -1
                       (1 + .04 + .005)
 
The Market Value Adjustment is an increase of $809.62 to the Guarantee Period
Value:
 
                        $809.62 = $42,000.00 X .0192766
 
The Market Adjusted Value would be:
 
                       $42,809.62 = $42,000.00 + $809.62
 
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value, as there were no prior
withdrawals:
 
                       $2,183.29 = $42,809.62 X .85 X .06
 
Thus, the amount payable on withdrawal would be:
 
                      $40,626.33 = $42,809.62 - $2,183.29
 
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
 
                        $404.81 = $21,000.00 X .0192766
 
The Market Adjusted Value of $21,000.00 would be:
 
                       $21,404.81 = $21,000.00 + $404.81
 
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
 
                 $899.00 = ($21,404.81 - .1 X $42,809.62) X .06
 
                                       99
<PAGE>   104
 
Thus, the amount payable on this partial withdrawal would be:
 
                       $20,505.81 = $21,404.81 - $899.00
 
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
 
                                       100
<PAGE>   105
 
APPENDIX B
 
KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND
VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT
 
This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Individual Retirement Annuities (IRAs), Roth
Individual Retirement Annuities (Roth IRAs) and Simple Individual Retirement
Annuities (SIMPLE IRAs). Internal Revenue Service regulations require that this
be given to each person desiring to establish an IRA, Roth IRA or a SIMPLE IRA.
Further information can be obtained from Kemper Investors Life Insurance Company
and from any district office of the Internal Revenue Service.
 
A. REVOCATION
 
Within 7 days of the date you signed your enrollment application, you may revoke
the Certificate and receive back 100% of your money. To do so, wire Kemper
Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or
call 1-800-621-5001.
 
B. STATUTORY REQUIREMENTS
 
This Certificate is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), Section 408A of the Code for use as a Roth IRA, or
of Section 408(p) of the Code for use as a SIMPLE IRA, whichever is applicable.
The Certificate has not been approved as to form for use as an IRA, Roth IRA or
a SIMPLE IRA by the Internal Revenue Service. Such approval by the Internal
Revenue Service is a determination only as to form of the Certificate, and does
not represent a determination on the merits of the Certificate.
 
1. The amount in your IRA, Roth IRA, and SIMPLE IRA, whichever is applicable,
must be fully vested at all times and the entire interest of the owner must be
nonforfeitable.
 
2. The Certificate must be nontransferable by the owner.
 
3. The Certificate must have flexible premiums.
 
4. For IRAs and SIMPLE IRAs, you must start receiving distributions on or before
April 1 of the year following the year in which you reach age 70 1/2 (the
required beginning date)(see "Required Distributions"). However, section
401(a)(9)(A) of the Code (relating to minimum distributions required to commence
at age 70 1/2), and the incidental death benefit requirements of section 401(a)
of the Code, do not apply to Roth IRAs.
 
If you die before your entire interest in your Certificate is distributed,
unless otherwise permitted under applicable law, any remaining interest in the
Certificate must be distributed to your beneficiary by December 31 of the
calendar year containing the fifth anniversary of your death; except that: (1)
if the interest is payable to an individual who is your designated beneficiary
(within the meaning of section 401(a)(9) of the Code), the designated
beneficiary may elect to receive the entire interest over his or her life, or
over a period certain not extending beyond his or her life expectancy,
commencing on or before December 31 of the calendar year immediately following
the calendar year in which you die; and (2) if the designated beneficiary is
your spouse, the Certificate will be treated as his or her own IRA, or, where
applicable, Roth IRA.
 
                                       101
<PAGE>   106
 
5. Except in the case of a rollover contribution or a direct transfer (see
"Rollovers and Direct Transfers"), or a contribution made in accordance with the
terms of a Simplified Employee Pension (SEP), (1) all contributions to an IRA,
including a Roth IRA, must be cash contributions which do not exceed $2,000 for
any taxable year, and (2) all contributions to a SIMPLE IRA must be cash
contributions, including matching or nonelective employer contributions (see
"SIMPLE IRAs"), which do not exceed $6,000 for any year (as adjusted for
inflation).
 
6. The Contract must be for the exclusive benefit of you and your beneficiaries.
 
C. ROLLOVERS AND DIRECT TRANSFERS FOR IRAS AND SIMPLE IRAS
 
1. A rollover is a tax-free transfer from one retirement program to another that
you cannot deduct on your tax return. There are two kinds of tax-free rollover
payments under an IRA. In one, you transfer amounts from one IRA to another.
With the other, you transfer amounts from a qualified employee benefit plan or
tax-sheltered annuity to an IRA. Tax-free rollovers can be made from a SIMPLE
IRA to another SIMPLE IRA or to a SIMPLE Individual Retirement Account under
section 408(p) of the Code. An individual can make a tax-free rollover to an IRA
from a SIMPLE IRA after a two-year period has expired since the individual first
participated in a SIMPLE plan.
 
2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan or SIMPLE
IRA.
 
3. A rollover distribution may be made to you only once a year. The one-year
period begins on the date you receive the rollover distribution, not on the date
you roll it over (reinvest it).
 
4. A direct transfer to an IRA of funds in an IRA from one trustee or insurance
company to another is NOT a rollover. It is a transfer that is not affected by
the one-year waiting period.
 
5. All or a part of the premium for this Certificate used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or
tax-sheltered annuity, or from a direct transfer from another IRA. All or part
of the premium for this Certificate used as a SIMPLE IRA may be paid from a
rollover from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the
extent permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE
Individual Retirement Account.
 
6. Beginning January 1, 1993, a distribution that is eligible for rollover
treatment from a qualified employee benefit plan or tax-sheltered annuity will
be subject to twenty percent (20%) withholding by the Internal Revenue Service
even if you roll the distribution over within the 60-day rollover period. One
way to avoid this withholding is to make the distribution as a direct transfer
to the IRA trustee or insurance company.
 
D. CONTRIBUTION LIMITS AND ALLOWANCE OF DEDUCTION FOR IRAS
 
1. In general, the amount you can contribute each year to an IRA is the lesser
of $2,000 or your taxable compensation for the year. If you have more than one
IRA, the limit applies to the total contributions made to your own IRAs for the
year. Generally, if you work the amount that you earn is compensation. Wages,
salaries, tips, professional fees, bonuses and other amounts you receive for
providing personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your deductible
contributions on your behalf to self-employed retirement plans is compensation.
If you are an active partner in a partnership and provide services to the
partnership, your share of partnership income reduced by deductible
contributions made on your behalf to qualified retirement plans is compensation.
All taxable alimony and separate maintenance payments received under a decree of
divorce or separate maintenance is compensation.
 
                                       102
<PAGE>   107
 
2. Beginning in 1997, in the case of a married couple filing a joint return, up
to $2,000 can be contributed to each spouse's IRA, even if one spouse has little
or no compensation. This means that the total combined contributions that can be
made to both IRAs can be as much as $4,000 for the year. Previously, if one
spouse had no compensation or elected to be treated as having no compensation,
the total combined contributions to both IRAs could not be more than $2,250.
 
3. Also beginning in 1997, in the case of a married couple with unequal
compensation who file a joint return, the limit on the deductible contributions
to the IRA of the spouse with less compensation is the smaller of:
 
     a. $2,000 or
 
     b. The total compensation of both spouses, reduced by any deduction allowed
     for contributions to IRAs of the spouse with more compensation.
 
The deduction for contributions to both spouses' IRAs may be further limited if
either spouse is covered by an employer retirement plan.
 
4. Beginning in 1998, even if your spouse is covered by an employer retirement
plan, you may be able to deduct your contributions to an IRA if you are not
covered by an employer plan. The deduction is limited to $2,000 and it must be
reduced if your adjusted gross income on a joint return is more than $150,000
but less than $160,000. Your deduction is eliminated if your income on a joint
return is $160,000 or more.
 
5. Contributions to your IRA can be made at any time. If you make the
contribution between January 1 and April 15, however, you may elect to treat the
contribution as made either in that year or in the preceding year. You may file
a tax return claiming a deduction for your IRA contribution before the
contribution is actually made. You must, however, make the contribution by the
due date of your return not including extensions.
 
6. You cannot make a contribution other than a rollover contribution to your IRA
for the year in which you reach age 70 1/2 or thereafter.
 
E. SEP-IRA'S
 
1. The maximum deductible contribution for a Simplified Employee Pension (SEP)
IRA is the lesser of $30,000 or 15% of compensation.
 
2. A SEP must be established and maintained by an employer (corporation,
partnership, sole proprietor). Information about the Kemper SEP is available
upon request.
 
F. SIMPLE IRAS
 
1. A SIMPLE IRA must be established with your employer using a qualified salary
reduction agreement.
 
2. You may elect to have your employer contribute to your SIMPLE IRA, under a
qualified salary reduction agreement, an amount (expressed as a percentage of
your compensation) not to exceed $6,000 (as adjusted for inflation) for the
year. In addition to these employee elective contributions, your employer is
required to make each year either (1) a matching contribution equal to up to 3
percent, and not less than 1 percent, of your SIMPLE IRA contribution for the
year, or (2) a nonelective contribution equal to 2 percent of your compensation
for the year (up to $150,000 of compensation, as adjusted for inflation). No
other contributions may be made to a SIMPLE IRA.
 
3. Employee elective contributions and employer contributions (I.E., matching
contributions and nonelective contributions) to your SIMPLE IRA are excluded
from your gross income.
                                       103
<PAGE>   108
 
4. To the extent an individual with a SIMPLE IRA is no longer participating in a
SIMPLE plan (E.G., the individual has terminated employment), and two years has
passed since the individual first participated in the plan, the individual may
treat the SIMPLE IRA as an IRA.
 
G. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
 
1. Earnings of your IRA annuity contract are not taxed until they are
distributed to you.
 
2. In general, taxable distributions are included in your gross income in the
year you receive them.
 
3. Distributions under your IRA are non-taxable to the extent they represent a
return of non-deductible contributions (if any). The non-taxable percentage of a
distribution is determined by dividing your total undistributed, non-deductible
IRA contributions by the value of all your IRAs (including SEPs and rollovers).
 
4. You cannot choose the special five-year or ten-year averaging that may apply
to lump sum distributions from qualified employer plans.
 
H. REQUIRED DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
 
You must start receiving minimum distributions required under the Certificate
and Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (I.E., the required beginning
date).
 
Annuity payments which begin by April 1 of the year following your 70 1/2 year
satisfy the minimum distribution requirement if they provide for non-increasing
payments over the life or the lives of you and your spouse, provided that, if
installments are guaranteed, the guaranty period does not exceed the lesser of
20 years or the applicable life expectancy.
 
The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.
 
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
 
If the actual distribution from your Certificate is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
 
I. ROTH IRAS
 
1. If your contract is a special type of individual retirement plan known as
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to an "IRA"
are to an "individual retirement plan," within the meaning of section
7701(a)(37) of the
 
                                       104
<PAGE>   109
 
Code, other than a Roth IRA.) Roth IRAs are treated the same as other IRAs,
except as described here. However, the provisions of the Code governing Roth
IRAs may be modified by pending legislation. We will notify you of any such
changes.
 
2. The IRS is not presently accepting submissions for opinion letters approving
annuities as Roth IRAs, but will issue in the future procedures for requesting
such opinion letters. We will apply for approval as soon as possible after the
IRS issues its procedures on this matter. Such approval will be a determination
only as to the form of the annuity, and will not represent a determination of
the merits of the annuity.
 
3. If your Certificate is a Roth IRA, we will send you a Roth IRA endorsement to
be attached to, and to amend, your contract after we obtain approval of the
endorsement from the IRS and your state insurance department. We reserve the
right to amend the contract as necessary or advisable from time to time to
comply with future changes in the Internal Revenue Code, regulations or other
requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
 
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
 
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAS
 
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA on or after January 1, 1998, only if you meet certain income limits. No
deduction is allowed for contributions to your Roth IRA. Contributions to your
Roth IRA may be made even after you attain age 70 1/2.
 
2. The aggregate amount of contributions for any taxable year to all IRAs,
including all Roth IRAs, maintained for your benefit (the "contribution limit")
generally is the lesser of $2,000 and 100% of your compensation for the taxable
year. However, if you file a joint return and receive less compensation for the
taxable year than your spouse, the contribution limit for the taxable year is
the lesser of $2,000 and the sum of (1) your compensation for the taxable year,
and (2) your spouse's compensation for the taxable year reduced by any
deductible contributions to an IRA of your spouse, and by any contributions to a
Roth IRA for your spouse, for the taxable year.
 
The contribution limit for any taxable year is reduced (but not below zero) by
the amount which bears the same ratio to such amount as:
 
     (a) the excess of (i) your adjusted gross income for the taxable year, over
         (ii) the "applicable dollar amount", bears to
 
     (b) $15,000 (or $10,000 if you are married).
 
For this purpose, "adjusted gross income" is determined in accordance with
section 219(g)(3) of the Code and (1) excludes any amount included in gross
income as a result of any rollover from, transfer from, or conversion of an IRA
to a Roth IRA, and (2) is reduced by any deductible IRA contribution. In
addition, the "applicable dollar amount" is equal to $150,000 for a married
individual filing a joint return, $0 for a married individual filing a separate
return, and $95,000 for any other individual.
 
A "qualified rollover contribution" (discussed in section K, below), and a
non-taxable transfer from another Roth IRA, are not taken into account for
purposes of determining the contribution limit.
 
K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAS
 
1. Rollovers And Transfers -- A rollover may be made to a Roth IRA only if it is
a "qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or
                                       105
<PAGE>   110
 
from an IRA, but only if such rollover contribution also meets the rollover
requirements for IRAs under section 408(d)(3). In addition, a transfer may be
made to a Roth IRA directly from another Roth IRA or from an IRA.
 
You may not make a qualified rollover contribution or transfer in a taxable year
from an IRA to a Roth IRA if (a) your adjusted gross income for the taxable year
exceeds $100,000 or (b) you are married and file a separate return.
 
The rollover requirements of section 408(d)(3) are complex and should be
carefully considered before you make a rollover. One of the requirements is that
the amount received be paid into another IRA (or Roth IRA) within 60 days after
receipt of the distribution. In addition, a rollover contribution from a Roth
IRA may be made by you only once a year. The one-year period begins on the date
you receive the Roth IRA distribution, not on the date you roll it over
(reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you
may roll over part of the withdrawal tax free into another Roth IRA and keep the
rest of it. A portion of the amount you keep may be included in your gross
income.
 
2. Taxation of Rollovers And Transfers to Roth IRAs -- A qualified rollover
contribution or transfer from a Roth IRA maintained for your benefit to another
Roth IRA maintained for your benefit which meets the rollover requirements for
IRAs under section 408(d)(3) is tax-free.
 
In the case of a qualified rollover contribution or a transfer from an IRA
maintained for your benefit to a Roth IRA maintained for your benefit, any
portion of the amount rolled over or transferred which would be includible in
your gross income were it not part of a qualified rollover contribution or a
nontaxable transfer will be includible in your gross income. However, section
72(t) of the Code (relating to the 10 percent penalty tax on premature
distributions) will not apply. If such a rollover or transfer occurs before
January 1, 1999, any portion of the amount rolled over or transferred which is
required to be included in gross income will be so included ratably over the
4-taxable year period beginning with the taxable year in which the rollover or
transfer is made.
 
Pending legislation may modify these rules retroactively to January 1, 1998.
 
3. Transfers of Excess IRA Contributions to Roth IRAs -- If, before the due date
of your federal income tax return for any taxable year (not including
extensions), you transfer, from an IRA, contributions for such taxable year (and
earnings thereon) to a Roth IRA, such amounts will not be includible in gross
income to the extent that no deduction was allowed with respect to such amount.
 
4. Taxation of Conversions of IRAs to Roth IRAs -- All or part of amounts in an
IRA maintained for your benefit may be converted into a Roth IRA maintained for
your benefit. The conversion of an IRA to a Roth IRA is treated as a special
type of qualified rollover contribution. Hence, you must be eligible to make a
qualified rollover contribution in order to convert an IRA to a Roth IRA. A
conversion typically will result in the inclusion of some or all of your IRA's
value in gross income, as described above.
 
A conversion of an IRA to a Roth IRA can be made without taking an actual
distribution from your IRA. For example, an individual may make a conversion by
notifying the IRA issuer or trustee, whichever is applicable.
 
UNDER SOME CIRCUMSTANCES, IT MIGHT NOT BE ADVISABLE TO ROLLOVER, TRANSFER, OR
CONVERT ALL OR PART OF AN IRA TO A ROTH IRA. WHETHER YOU SHOULD DO SO WILL
DEPEND ON YOUR PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED
TO, SUCH FACTORS AS WHETHER YOU QUALIFY TO MAKE SUCH A ROLLOVER, TRANSFER, OR
CONVERSION, YOUR FINANCIAL SITUATION, AGE, CURRENT AND FUTURE INCOME NEEDS,
YEARS TO RETIREMENT, CURRENT AND FUTURE TAX RATES, YOUR
 
                                       106
<PAGE>   111
 
ABILITY AND DESIRE TO PAY CURRENT INCOME TAXES WITH RESPECT TO AMOUNTS ROLLED
OVER, TRANSFERRED, OR CONVERTED, AND WHETHER SUCH TAXES MIGHT NEED TO BE PAID
WITH WITHDRAWALS FROM YOUR ROTH IRA (SEE DISCUSSION BELOW OF "NONQUALIFIED
DISTRIBUTIONS"). YOU SHOULD CONSULT A QUALIFIED TAX ADVISOR BEFORE ROLLING OVER,
TRANSFERRING, OR CONVERTING ALL OR PART OF AN IRA TO A ROTH IRA.
 
5. Separate Roth IRAs -- Due to the complexity of, and proposed changes to, the
tax law, it may be advantageous to maintain amounts rolled over, transferred, or
converted from an IRA in separate Roth IRAs from those containing regular Roth
IRA contributions. For the same reason, you should consider maintaining a
separate Roth IRA for each amount rolled over, transferred, or converted from an
IRA. These considerations should be balanced against the additional costs you
may incur from maintaining multiple Roth IRAs. You should consult your tax
advisor if you intend to contribute rollover, transfer, or conversion amounts to
your Policy, or if you intend to roll over or transfer amounts from your Policy
to another Roth IRA maintained for your benefit.
 
L. INCOME TAX CONSEQUENCES OF ROTH IRAS
 
1. Qualified Distributions -- Any "qualified distribution" from a Roth IRA is
excludible from gross income. A "qualified distribution" is a payment or
distribution which satisfies two requirements. First, the payment or
distribution must be (a) made after you attain 59 1/2, (b) made after your
death, (c) attributable to your being disabled, or (d) a "qualified special
purpose distribution" (I.E., a qualified first-time homebuyer distribution under
section 72(t)(2)(F) of the Code). Second, the payment or distribution must be
made in a taxable year that is at least five years after (1) the first taxable
year for which a contribution was made to any Roth IRA established for you, or
(2) in the case of a rollover from, or a conversion of, an IRA to a Roth IRA,
the taxable year in which the rollover or conversion was made if the payment or
distribution is allocable (as determined in the manner set forth in guidance
issued by the IRS) to the rollover contribution or conversion (or to income
allocable thereto).
 
2. Nonqualified Distributions -- A distribution from a Roth IRA which is not a
qualified distribution is taxed under section 72 (relating to annuities), except
that such distribution is treated as made first from contributions to the Roth
IRA to the extent that such distribution, when added to all previous
distributions from the Roth IRA, does not exceed the aggregate amount of
contributions to the Roth IRA. For purposes of determining the amount taxed, (a)
all Roth IRAs established for you will be treated as one contract, (b) all
distributions during any taxable year from Roth IRAs established for you will be
treated as one distribution, and (c) the value of the contract, income on the
contract, and investment in the contract, if applicable, will be computed as of
the close of the calendar year in which the taxable year begins.
 
An additional tax of 10% is imposed on nonqualified distributions (including
amounts deemed distributed as the result of a prohibited loan or use of your
Roth IRA as security for a loan) made before the benefited individual has
attained age 59 1/2, unless one of the exceptions discussed in Section N
applies.
 
M. TAX ON EXCESS CONTRIBUTIONS
 
1. You must pay a 6% excise tax each year on excess contributions that remain in
your Certificate. Generally, an excess contribution is the amount contributed to
your Certificate that is more than you can contribute. The excess is taxed for
the year of the excess contribution and for each year after that until you
correct it.
 
                                       107
<PAGE>   112
 
2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your Certificate before your tax return is
due if the income earned on the excess was also withdrawn and no deduction was
allowed for the excess contribution. You must include in your gross income the
income earned on the excess contribution.
 
N. TAX ON PREMATURE DISTRIBUTIONS
 
There is an additional tax on premature distributions from your IRA, Roth IRA or
SIMPLE IRA, equal to 10% of the amount of the premature distribution that you
must include in your gross income. For premature distributions from a SIMPLE IRA
made within the first 2 years you participate in a SIMPLE plan, the additional
tax is equal to 25% of the amount of the premature distribution that must be
included in gross income. Premature distributions are generally amounts you
withdraw before you are age 59 1/2. However, the tax on premature distributions
does not apply:
 
1. To amounts that are rolled over tax free;
 
2. To a distribution which is made on or after your death, or on account of you
being disabled within the meaning of section 72(m)(7) of the Code;
 
3. To a distribution which is part of a series of substantially equal periodic
payments (made at least annually) over your life or your life expectancy or the
joint life or joint life expectancy of you and your beneficiary; or
 
4. To a distribution which is used for qualified first-time homebuyer expenses,
qualified high education expenses, certain medical expenses, or by an unemployed
individual to pay health insurance premiums.
 
O. IRA EXCISE TAX REPORTING
 
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA, Roth IRA or SIMPLE IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
 
P. BORROWING
 
If you borrow money against your Certificate or use it as security for a loan,
the Certificate will lose its classification as an IRA, Roth IRA or SIMPLE IRA ,
whichever is applicable, and you must include in gross income the fair market
value of the contract as of the first day of your tax year. In addition, you may
be subject to the tax on premature distributions described above. (Note: This
Certificate does not allow borrowings against it, nor may it be assigned or
pledged as collateral for a loan.)
 
Q. REPORTING
 
We will provide you with any reports required by the Internal Revenue Service.
 
R. ESTATE TAX
 
Generally, the value of your IRA, including your Roth IRA, is included in your
gross estate for federal estate tax purposes.
 
                                       108
<PAGE>   113
 
S. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
AND MVA OPTION.
 
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Certificate will be assessed a daily charge of an amount which will equal
an aggregate of 1.25% per annum.
 
2. An annual records maintenance charge of $30.00 will be assessed against the
Separate Account Value each Certificate Year. If no values are in the
Subaccounts, the charge will be assessed against Guarantee Period Value.
 
3. Withdrawal and early annuitization charges will be assessed based on the
Certificate Years elapsed since the Certificate was issued as described in the
prospectus under the heading "Withdrawal Charge."
 
Withdrawals, transfers and early annuitizations of Guarantee Period Value may be
subject to a Market Value Adjustment as described in the prospectus under the
heading "Market Value Adjustment."
 
4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value" for Separate Account
Value and under the headings "Guarantee Periods of the MVA Option" and
"Establishment of Guaranteed Interest Rates" for Guarantee Period Value.
 
5. The growth in value of your Certificate is neither guaranteed nor projected
but is based on the investment experience of the Subaccounts or rates of
interest as declared by Kemper Investors Life Insurance Company.
 
                                       109
<PAGE>   114
 
                      STATEMENT OF ADDITIONAL INFORMATION
 
   
                                  MAY 1, 1999
    
 
--------------------------------------------------------------------------------
 
            INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED
 
                           DEFERRED ANNUITY CONTRACTS
 
--------------------------------------------------------------------------------
 
                                KEMPER PASSPORT
 
                                   ISSUED BY
 
   
                    KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
    
   
                                      AND
    
 
                    KEMPER INVESTORS LIFE INSURANCE COMPANY
 
   HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049     (847) 550-5500
 
   
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 1999. The Prospectus may be obtained from Kemper
Investors Life Insurance Company by writing or calling the address or telephone
number listed above.
    
 
                               ------------------
 
                               TABLE OF CONTENTS
 
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Services to the Separate Account............................  B-1
Performance Information of Subaccounts......................  B-1
State Regulation............................................  B-4
Experts.....................................................  B-4
Financial Statements........................................  B-4
Report of Independent Accountants...........................  B-5
Financial Statements of the Separate Account................  B-6
Appendix A Table of Historical Hypothetical Accumulation
  Unit Values and Performance Information...................  B-24
Appendix B State Premium Tax Chart..........................  B-37
</TABLE>
    
<PAGE>   115
 
                        SERVICES TO THE SEPARATE ACCOUNT
 
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Portfolio
of the Kemper Investors Fund (the "Fund") by each of the Subaccounts. All
expenses incurred in the operations of the Separate Account, except the charge
for mortality and expense risk and administrative expenses, and records
maintenance charge (as described in the Prospectus) are borne by KILICO.
 
   
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 1997 and 1998. The firm
performed the annual audit of the financial statements of the Separate Account
and KILICO for the years ended December 31, 1997 and 1998.
    
 
The Certificates are sold by licensed insurance agents, where the Certificates
may be lawfully sold, 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 Certificates are
distributed through the principal underwriter for the Separate Account,
Investors Brokerage Services, Inc., a subsidiary of KILICO, which enters into
selling group agreements with the affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
 
   
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1998, 1997 and 1996, KILICO incurred gross commissions payable
of approximately $4.2, $5.6 and $8.1 million, respectively, to licensed
insurance agents.
    
 
                     PERFORMANCE INFORMATION OF SUBACCOUNTS
 
As described in the prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, Kemper Investment Grade Bond Subaccount, Kemper Government
Securities Subaccount, and Kemper Global Income Subaccount; and "yield" and
"effective yield" information may be provided in the case of the Kemper Money
Market Subaccount #1 and Kemper Money Market Subaccount #2 (collectively, the
"Kemper Money Market Subaccounts"). These various measures of performance are
described below.
 
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Subaccount for a specific period is found by first taking a hypothetical $1,000
investment in each of the Subaccount's units on the first day of the period at
the maximum offering price, which is the Accumulation Unit value per unit
("initial investment") and computing the ending redeemable value ("redeemable
value") of that investment at the end of the period. The redeemable value
reflects the effect of the applicable Withdrawal Charge that may be imposed at
the end of the period as well as all other recurring charges and fees applicable
under the Certificate to all Certificate Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. Standardized average annual total return figures
are
 
                                       B-1
<PAGE>   116
 
annualized and, therefore, represent the average annual percentage change in the
value of a Subaccount over the applicable period.
 
No standard formula has been prescribed for calculating total return
performance. Nonstandardized total return performance for a specific period is
calculated by first taking an investment (assumed to be $40,000 below) in each
Subaccount's units on the first day of the period at the maximum offering price,
which is the Accumulation Unit Value per unit ("initial investment") and
computing the ending value ("ending value") of that investment at the end of the
period. The ending value does not include the effect of the applicable
Withdrawal Charge that may be imposed at the end of the period, and thus may be
higher than if such charge were deducted. Premium taxes are not included in the
term charges. The nonstandardized total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
An assumed investment of $40,000 was chosen because that approximates the size
of a typical account. The account size used affects the performance figure
because the Records Maintenance Charge is a fixed per account charge. Both
annualized and nonannualized (cumulative) nonstandardized total return figures
may be provided. Annualized nonstandardized total return figures represent the
average annual percentage change in the value of a Subaccount over the
applicable period while nonannualized (cumulative) figures represent the actual
percentage change over the applicable period.
 
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return will cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
 
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
 
   
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount, and the Kemper Government Securities Subaccount, and the Kemper
Global Income Subaccount is computed in accordance with a standard method
prescribed by rules of the Securities and Exchange Commission. The yields for
the Kemper High Yield Subaccount, the Kemper Government Securities Subaccount
and the Kemper Investment Grade Bond Subaccount, based upon the one month period
ended March 31, 1999 were        %,        % and        %, respectively. The
yield quotation is computed by dividing the net investment income per unit
earned during the specified one month or 30-day period by the accumulation
    
 
                                       B-2
<PAGE>   117
 
unit values on the last day of the period, according to the following formula
that assumes a semi-annual reinvestment of income:
 
<TABLE>
  <S>          <C>       <C>
                 a - b
                -------
  YIELD = 2[(             +1)(6) - 1
                  cd
</TABLE>
 
a = net dividends and interest earned during the period by the Fund attributable
    to the Subaccount
 
b = expenses accrued for the period (net of reimbursements)
 
c = the average daily number of Accumulation Units outstanding during the period
 
d = the Accumulation Unit value per unit on the last day of the period
 
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
withdrawal charges or premium taxes.
 
   
The Kemper Money Market Subaccounts' yields are computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit Value during
the period is divided by the Accumulation Unit Value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Account's portfolio are not included in the calculation. The
yield for the seven-day period ended March 31, 1999 was 3.12% for the Kemper
Money Market Subaccount #1 and 4.36% for Kemper Money Market Subaccount #2. The
average portfolio maturity was 14 days.
    
 
   
The Kemper Money Market Subaccounts' effective yields are determined by taking
the base period return (computed as described above) and calculating the effect
of assumed compounding. The formula for the effective yield is: (base period
return +1) (365) / (7) - 1. The effective yield for the seven-day period ended
March 31, 1999 was 3.16% for the Kemper Money Market Subaccount #1 and 4.46% for
Kemper Money Market Subaccount #2.
    
 
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
 
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years.
Yield, effective yield and nonstandardized total return do not reflect the
effect of the Withdrawal Charge or premium taxes that may be imposed upon the
redemption of units. Standardized average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.
 
                                       B-3
<PAGE>   118
 
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes, including the
Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the
Consumer Price Index, the CDA Certificate of Deposit Index, the Salomon Brothers
High Grade Corporate Bond Index, the Lehman Brothers Government/Corporate Bond
Index, the Merrill Lynch Government/Corporate Master Index, the Lehman Brothers
Long Government/Corporate Bond Index, the Lehman Brothers Government/Corporate
1-3 Year Bond Index, the Standard & Poor's Midcap 400 Index, the NASDAQ
Composite Index, the Russell 2000 Index and the Morgan Stanley Capital
International Europe, Australia, Far East Index. In addition, the Subaccounts
may provide performance analysis rankings of Lipper Analytical Services, Inc.,
the VARDS Report, MORNINGSTAR, INC., Ibbotson Associates or Micropal. Please
note the differences and similarities between the investments which a Subaccount
may purchase and the investments measured by the indexes which are described
below. In particular, it should be noted that certificates of deposit may offer
fixed or variable yields and principal is guaranteed and may be insured. The
units of the Subaccounts are not insured. Also, the value of the Subaccounts
will fluctuate. From time to time, the Separate Account may quote information
from publications such as MORNINGSTAR, INC., THE WALL STREET JOURNAL, MONEY
MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA TODAY,
INSTITUTIONAL INVESTOR, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE, BROKER
WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
 
The tables in Appendix A include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1997, and compares these quotations to various indexes.
 
                                STATE REGULATION
 
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
 
                                    EXPERTS
 
   
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1998 and the related statement of operations
for the year then ended and the statements of changes in contract owners' equity
for the years ended December 31, 1998 and 1997 have been included herein in
reliance upon the report of PricewaterhouseCoopers LLP, independent public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
    
 
   
                              FINANCIAL STATEMENTS
    
 
This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to the Certificates and also
reflect assets attributable to other variable annuity contracts offered by
KILICO through the Separate Account.
 
                                       B-4
<PAGE>   119
 
   
                       REPORT OF INDEPENDENT ACCOUNTANTS
    
 
   
The Board of Directors of
    
   
Kemper Investors Life Insurance Company and
    
   
Contract Owners of KILICO Variable Annuity Separate Account:
    
 
   
In our opinion, the accompanying statement of assets and liabilities and
contract owners' equity and the related statement of operations and changes in
owner's equity presently fairly, in all material respects, the financial
position of the subaccounts of KILICO Variable Annuity Separate Account, which
includes the Money Market Subaccount, Money Market Subaccount #2, Total Return
Subaccount, High Yield Subaccount, Growth Subaccount, Government Securities
Subaccount, International Subaccount, Small Cap Growth Subaccount, Investment
Grade Bond Subaccount, Contrarian Value Subaccount, Small Cap Value Subaccount,
Value+Growth Subaccount, Horizon 20+ Subaccount, Horizon 10+ Subaccount, Horizon
5 Subaccount, Global Income Subaccount, and Blue Chip Subaccount (investment
options within the Investors Fund Series), thereof, at December 31, 1998 and the
changes in their equity for the year then ended and for each of the period
presented, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Kemper Investors Life Insurance
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
direct confirmation of investments owned at December 31, 1998 by correspondence
with transfer agents, provides a reasonable basis for the opinion expressed
above.
    
 
   
PricewaterhouseCoopers LLP
    
 
   
Chicago, Illinois
    
   
February 19, 1999
    
 
                                       B-5
<PAGE>   120
 
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
 
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
 
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
                                   MONEY          MONEY         TOTAL         HIGH                   GOVERNMENT
                                   MARKET        MARKET         RETURN       YIELD        GROWTH     SECURITIES   INTERNATIONAL
                                 SUBACCOUNT   SUBACCOUNT #2   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT    SUBACCOUNT
                                 ----------   -------------   ----------   ----------   ----------   ----------   -------------
<S>                              <C>          <C>             <C>          <C>          <C>          <C>          <C>
ASSETS
  Investments in underlying
    portfolio funds, at current
    values.....................   $106,985        4,700        737,296      262,814      538,414       78,453        145,348
  Dividends and other
    receivables................        223            9              2            1           12           --              4
                                  --------        -----        -------      -------      -------       ------        -------
         Total assets..........    107,208        4,709        737,298      262,815      538,426       78,453        145,352
                                  --------        -----        -------      -------      -------       ------        -------
LIABILITIES AND CONTRACT
  OWNERS' EQUITY
  Liabilities:
    Mortality and expense risk
      and administrative
      charges..................        103           --            780          285          559           84            151
    Units of Account
      Redeemed.................         --           --              6           --           --           18             --
    Other......................          3           --            133          168          122            6             20
                                  --------        -----        -------      -------      -------       ------        -------
         Total liabilities.....        106           --            919          453          681          108            171
                                  --------        -----        -------      -------      -------       ------        -------
  Contract owners' equity......   $107,102        4,709        736,379      262,362      537,745       78,345        145,181
                                  ========        =====        =======      =======      =======       ======        =======
ANALYSIS OF CONTRACT OWNERS'
  EQUITY
  Excess of proceeds from units
    sold over payments for
    units redeemed.............   $ 34,061        3,269        102,938       49,875      131,199       41,028         78,316
  Accumulated net investment
    income (loss)..............     73,041        1,440        415,826      199,073      282,440       34,537         13,462
  Accumulated net realized gain
    on sales of investments....         --           --        108,949       10,808       69,603          957         29,972
  Unrealized appreciation
    (depreciation) of
    investments................         --           --        108,666        2,606       54,503        1,823         23,431
                                  --------        -----        -------      -------      -------       ------        -------
  Contract owners' equity......   $107,102        4,709        736,379      262,362      537,745       78,345        145,181
                                  ========        =====        =======      =======      =======       ======        =======
 
<CAPTION>
                                 SMALL CAP
                                   GROWTH
                                 SUBACCOUNT
                                 ----------
<S>                              <C>
ASSETS
  Investments in underlying
    portfolio funds, at current
    values.....................   144,050
  Dividends and other
    receivables................        13
                                  -------
         Total assets..........   144,063
                                  -------
LIABILITIES AND CONTRACT
  OWNERS' EQUITY
  Liabilities:
    Mortality and expense risk
      and administrative
      charges..................       144
    Units of Account
      Redeemed.................        --
    Other......................        38
                                  -------
         Total liabilities.....       182
                                  -------
  Contract owners' equity......   143,881
                                  =======
ANALYSIS OF CONTRACT OWNERS'
  EQUITY
  Excess of proceeds from units
    sold over payments for
    units redeemed.............    83,272
  Accumulated net investment
    income (loss)..............    25,692
  Accumulated net realized gain
    on sales of investments....    15,321
  Unrealized appreciation
    (depreciation) of
    investments................    19,596
                                  -------
  Contract owners' equity......   143,881
                                  =======
</TABLE>
 
See accompanying notes to financial statements.
 
                                       B-6
<PAGE>   121
 
<TABLE>
<CAPTION>
    INVESTMENT   CONTRARIAN   SMALL CAP      VALUE+      HORIZON      HORIZON
    GRADE BOND     VALUE        VALUE        GROWTH        20+          10+       HORIZON 5    GLOBAL INCOME   BLUE CHIP
    SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT    SUBACCOUNT     SUBACCOUNT
    ----------   ----------   ----------   ----------   ----------   ----------   ----------   -------------   ----------
<S> <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>             <C>
      11,490       95,958       33,386       47,062       9,223        15,456       6,805          1,428         8,794
         142            2           17           --          --            --          19             --            --
      ------       ------       ------       ------       -----        ------       -----          -----         -----
      11,632       95,960       33,403       47,062       9,223        15,456       6,824          1,428         8,794
      ------       ------       ------       ------       -----        ------       -----          -----         -----
          11          100           33           47           9            15           7              1             8
          --           --           --           --          --            --          --             --            --
          --           10            4           10           1             2          --             --             2
      ------       ------       ------       ------       -----        ------       -----          -----         -----
          11          110           37           57          10            17           7              1            10
      ------       ------       ------       ------       -----        ------       -----          -----         -----
      11,621       95,850       33,366       47,005       9,213        15,439       6,817          1,427         8,784
      ======       ======       ======       ======       =====        ======       =====          =====         =====
      10,820       68,393       33,364       37,086       7,238        12,897       5,867          1,281         8,056
          61        1,365          223          180          57            74          56             28           (44)
         384        9,023        2,054        2,345         574           552         334             57           129
         356       17,069       (2,275)       7,394       1,344         1,916         560             61           643
      ------       ------       ------       ------       -----        ------       -----          -----         -----
      11,621       95,850       33,366       47,005       9,213        15,439       6,817          1,427         8,784
      ======       ======       ======       ======       =====        ======       =====          =====         =====
</TABLE>
 
                                       B-7
<PAGE>   122
 
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
 
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
   
<TABLE>
<CAPTION>
                                 MONEY          MONEY         TOTAL                                GOVERNMENT
                                 MARKET        MARKET         RETURN     HIGH YIELD     GROWTH     SECURITIES   INTERNATIONAL
                               SUBACCOUNT   SUBACCOUNT #2   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT    SUBACCOUNT
                               ----------   -------------   ----------   ----------   ----------   ----------   -------------
<S>                            <C>          <C>             <C>          <C>          <C>          <C>          <C>
Dividends and capital gains
  distributions..............   $ 4,272          264         124,719       21,044       87,153       4,579          7,607
Expenses:
  Mortality and expense risk
    and administrative
    charges..................     1,104           --          10,155        3,895        7,438       1,010          2,132
                                -------          ---         -------      -------      -------       -----         ------
Net investment income
  (loss).....................     3,168          264         114,564       17,149       79,715       3,569          5,475
                                -------          ---         -------      -------      -------       -----         ------
Net realized and unrealized
  gain (loss) on investments:
  Net realized gain (loss) on
    sales of investments.....        --           --          20,649        4,283        8,570         (67)        11,865
  Change in unrealized
    appreciation
    (depreciation) of
    investments..............        --           --         (41,076)     (17,978)     (20,871)        553         (3,914)
                                -------          ---         -------      -------      -------       -----         ------
Net realized and unrealized
  gain (loss) on
  investments................        --           --         (20,427)     (13,695)     (12,301)        486          7,951
                                -------          ---         -------      -------      -------       -----         ------
Net increase (decrease) in
  contract owners' equity
  resulting from
  operations.................   $ 3,168          264          94,137        3,454       67,414       4,055         13,426
                                =======          ===         =======      =======      =======       =====         ======
 
<CAPTION>
                               SMALL CAP
                                 GROWTH
                               SUBACCOUNT
                               ----------
<S>                            <C>
Dividends and capital gains
  distributions..............    20,052
Expenses:
  Mortality and expense risk
    and administrative
    charges..................     1,671
                                 ------
Net investment income
  (loss).....................    18,381
                                 ------
Net realized and unrealized
  gain (loss) on investments:
  Net realized gain (loss) on
    sales of investments.....     4,201
  Change in unrealized
    appreciation
    (depreciation) of
    investments..............    (2,782)
                                 ------
Net realized and unrealized
  gain (loss) on
  investments................     1,419
                                 ------
Net increase (decrease) in
  contract owners' equity
  resulting from
  operations.................    19,800
                                 ======
</TABLE>
    
 
See accompanying notes to financial statements.
 
                                       B-8
<PAGE>   123
 
<TABLE>
<CAPTION>
    INVESTMENT   CONTRARIAN   SMALL CAP                                                               GLOBAL
    GRADE BOND     VALUE        VALUE      VALUE+GROWTH   HORIZON 20+   HORIZON 10+   HORIZON 5       INCOME         BLUE CHIP
    SUBACCOUNT   SUBACCOUNT   SUBACCOUNT    SUBACCOUNT    SUBACCOUNT    SUBACCOUNT    SUBACCOUNT    SUBACCOUNT      SUBACCOUNT
    ----------   ----------   ----------   ------------   -----------   -----------   ----------   -------------   -------------
<S> <C>          <C>          <C>          <C>            <C>           <C>           <C>          <C>             <C>
       198          2,907          885          884           253            308         184             36              25
          
       100          1,147          442          480           110            151          81              1              49
          
       ---         ------       ------        -----           ---          -----         ---            ---             ---
        98          1,760          443          404           143            157         103             35             (24)
       ---         ------       ------        -----           ---          -----         ---            ---             ---
       311          6,261          911        1,727           397            414         236             36             102
          
        78          6,236       (6,089)       3,626           309            604         115             56             589
          
       ---         ------       ------        -----           ---          -----         ---            ---             ---
       389         12,497       (5,178)       5,353           706          1,018         351             92             691
       ---         ------       ------        -----           ---          -----         ---            ---             ---
       487         14,257       (4,735)       5,757           849          1,175         454            127             667
          
       ===         ======       ======        =====           ===          =====         ===            ===             ===
</TABLE>
 
                                       B-9
<PAGE>   124
 
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
   
<TABLE>
<CAPTION>
                                MONEY          MONEY         TOTAL         HIGH                   GOVERNMENT
                                MARKET        MARKET         RETURN       YIELD        GROWTH     SECURITIES   INTERNATIONAL
                              SUBACCOUNT   SUBACCOUNT #2   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT    SUBACCOUNT
                              ----------   -------------   ----------   ----------   ----------   ----------   -------------
<S>                           <C>          <C>             <C>          <C>          <C>          <C>          <C>
Operations:
  Net investment income
    (loss)..................  $   3,168          264         114,564      17,149       79,715        3,569          5,475
  Net realized gain (loss)
    on sales of
    investments.............         --           --          20,649       4,283        8,570          (67)        11,865
  Change in unrealized
    appreciation
    (depreciation) of
    investments.............         --           --         (41,076)    (17,978)     (20,871)         553         (3,914)
                              ---------       ------        --------     -------      -------      -------        -------
    Net increase (decrease)
      in contract owners'
      equity resulting from
      operations............      3,168          264          94,137       3,454       67,414        4,055         13,426
                              ---------       ------        --------     -------      -------      -------        -------
Account unit transactions:
  Proceeds from units
    sold....................     22,035        6,045          35,608      27,800       29,595       10,692          8,825
  Net transfers (to) from
    affiliate and
    subaccounts.............     29,478       (7,639)        (47,643)    (40,100)     (26,086)       5,342        (20,766)
  Payments for units
    redeemed................    (21,333)        (355)        (88,507)    (34,613)     (60,278)     (14,565)       (16,900)
                              ---------       ------        --------     -------      -------      -------        -------
    Net increase (decrease)
      in contract owners'
      equity from account
      unit transactions.....     30,180       (1,949)       (100,542)    (46,913)     (56,769)       1,469        (28,841)
                              ---------       ------        --------     -------      -------      -------        -------
Total increase (decrease) in
  contract owners' equity...     33,348       (1,685)         (6,405)    (43,459)      10,645        5,524        (15,415)
Beginning of period.........     73,754        6,394         742,784     305,821      527,100       72,821        160,596
                              ---------       ------        --------     -------      -------      -------        -------
End of period...............  $ 107,102        4,709         736,379     262,362      537,745       78,345        145,181
                              =========       ======        ========     =======      =======      =======        =======
 
<CAPTION>
                              SMALL CAP
                                GROWTH
                              SUBACCOUNT
                              ----------
<S>                           <C>
Operations:
  Net investment income
    (loss)..................    18,381
  Net realized gain (loss)
    on sales of
    investments.............     4,201
  Change in unrealized
    appreciation
    (depreciation) of
    investments.............    (2,782)
                               -------
    Net increase (decrease)
      in contract owners'
      equity resulting from
      operations............    19,800
                               -------
Account unit transactions:
  Proceeds from units
    sold....................    17,275
  Net transfers (to) from
    affiliate and
    subaccounts.............     2,566
  Payments for units
    redeemed................    (8,623)
                               -------
    Net increase (decrease)
      in contract owners'
      equity from account
      unit transactions.....    11,218
                               -------
Total increase (decrease) in
  contract owners' equity...    31,018
Beginning of period.........   112,863
                               -------
End of period...............   143,881
                               =======
</TABLE>
    
 
See accompanying notes to financial statements.
 
                                      B-10
<PAGE>   125
 
<TABLE>
<CAPTION>
    INVESTMENT   CONTRARIAN   SMALL CAP      VALUE+      HORIZON      HORIZON
    GRADE BOND     VALUE        VALUE        GROWTH        20+          10+       HORIZON 5    GLOBAL INCOME     BLUE CHIP
    SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT    SUBACCOUNT      SUBACCOUNT
    ----------   ----------   ----------   ----------   ----------   ----------   ----------   -------------    ----------
<S> <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>             <C>
          98        1,760          443          404         143           157         103             35             (24)
         311        6,261          911        1,727         397           414         236             36             102
          78        6,236       (6,089)       3,626         309           604         115             56             589
      ------       ------       ------       ------       -----        ------       -----          -----           -----
         487       14,257       (4,735)       5,757         849         1,175         454            127             667
      ------       ------       ------       ------       -----        ------       -----          -----           -----
       2,850       15,517        6,528        7,814       2,155         2,644       1,628             47           2,261
       3,781       (5,407)       1,040        8,749         116         3,301         221            933           4,001
        (955)      (6,599)      (2,717)      (3,236)       (375)         (841)       (384)            (6)           (223)
      ------       ------       ------       ------       -----        ------       -----          -----           -----
       5,676        3,511        4,851       13,327       1,896         5,104       1,465            974           6,039
      ------       ------       ------       ------       -----        ------       -----          -----           -----
       6,163       17,768          116       19,084       2,745         6,279       1,919          1,101           6,706
       5,458       78,082       33,250       27,921       6,468         9,160       4,898            326           2,078
      ------       ------       ------       ------       -----        ------       -----          -----           -----
      11,621       95,850       33,366       47,005       9,213        15,439       6,817          1,427           8,784
      ======       ======       ======       ======       =====        ======       =====          =====           =====
</TABLE>
 
                                      B-11
<PAGE>   126
 
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
                                 MONEY          MONEY         TOTAL         HIGH                   GOVERNMENT
                                 MARKET        MARKET         RETURN       YIELD        GROWTH     SECURITIES   INTERNATIONAL
                               SUBACCOUNT   SUBACCOUNT #2   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT    SUBACCOUNT
                               ----------   -------------   ----------   ----------   ----------   ----------   -------------
<S>                            <C>          <C>             <C>          <C>          <C>          <C>          <C>
Operations:
  Net investment income
    (loss)...................   $  2,939           373        97,860       20,076      105,197        5,218          6,840
  Net realized gain (loss) on
    sales of investments.....         --            --        21,466        5,634       13,791         (133)         9,738
  Change in unrealized
    appreciation
    (depreciation) of
    investments..............         --            --         1,837        2,376      (29,191)         284         (2,788)
                                --------       -------       -------      -------      -------      -------        -------
    Net increase in contract
      owners' equity
      resulting from
      operations.............      2,939           373       121,163       28,086       89,797        5,369         13,790
                                --------       -------       -------      -------      -------      -------        -------
Account unit transactions:
  Proceeds from units sold...     21,938         7,884        36,774       26,456       32,804        6,125         14,396
  Net transfers (to) from
    affiliate and
    subaccounts..............      7,054       (10,145)      (30,823)        (473)     (35,916)      (6,847)       (14,865)
  Payments for units
    redeemed.................    (17,525)         (213)      (75,741)     (34,745)     (43,779)     (11,513)       (15,633)
                                --------       -------       -------      -------      -------      -------        -------
    Net increase (decrease)
      in contract owners'
      equity from account
      unit transactions......     11,467        (2,474)      (69,790)      (8,762)     (46,891)     (12,235)       (16,102)
                                --------       -------       -------      -------      -------      -------        -------
Total increase (decrease) in
  contract owners' equity....     14,406        (2,101)       51,373       19,324       42,906       (6,866)        (2,312)
Beginning of period..........     59,348         8,495       691,411      286,497      484,194       79,687        162,908
                                --------       -------       -------      -------      -------      -------        -------
End of period................   $ 73,754         6,394       742,784      305,821      527,100       72,821        160,596
                                ========       =======       =======      =======      =======      =======        =======
 
<CAPTION>
                               SMALL CAP
                                 GROWTH
                               SUBACCOUNT
                               ----------
<S>                            <C>
Operations:
  Net investment income
    (loss)...................     7,284
  Net realized gain (loss) on
    sales of investments.....     8,226
  Change in unrealized
    appreciation
    (depreciation) of
    investments..............     8,507
                                -------
    Net increase in contract
      owners' equity
      resulting from
      operations.............    24,017
                                -------
Account unit transactions:
  Proceeds from units sold...    14,943
  Net transfers (to) from
    affiliate and
    subaccounts..............    11,461
  Payments for units
    redeemed.................    (6,408)
                                -------
    Net increase (decrease)
      in contract owners'
      equity from account
      unit transactions......    19,996
                                -------
Total increase (decrease) in
  contract owners' equity....    44,013
Beginning of period..........    68,850
                                -------
End of period................   112,863
                                =======
</TABLE>
 
---------------
 
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
    1997.
 
See accompanying notes to financial statements.
 
                                      B-12
<PAGE>   127
 
<TABLE>
<CAPTION>
    INVESTMENT
      GRADE      CONTRARIAN   SMALL CAP      VALUE+      HORIZON      HORIZON
       BOND        VALUE        VALUE        GROWTH        20+          10+       HORIZON 5    GLOBAL INCOME     BLUE CHIP
    SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT   SUBACCOUNT(A)   SUBACCOUNT(A)
    ----------   ----------   ----------   ----------   ----------   ----------   ----------   -------------   -------------
<S> <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>             <C>
        (26)         (318)        (176)        (161)        (58)         (53)         (33)           (7)             (20)
         71         2,750        1,194          619         161          129           97            21               27
        248         9,122        3,077        3,038         777          945          320             5               54
      -----        ------       ------       ------       -----        -----        -----           ---            -----
        293        11,554        4,095        3,496         880        1,021          384            19               61
      -----        ------       ------       ------       -----        -----        -----           ---            -----
      1,403        16,729        8,235        8,265       1,223        1,730        1,182            44            1,073
      2,113        31,875        9,674        7,531       1,114        1,220        1,152           263            1,027
       (224)       (2,935)      (1,625)      (1,266)       (179)        (395)        (200)           --              (83)
      -----        ------       ------       ------       -----        -----        -----           ---            -----
      3,292        45,669       16,284       14,530       2,158        2,555        2,134           307            2,017
      -----        ------       ------       ------       -----        -----        -----           ---            -----
      3,585        57,223       20,379       18,026       3,038        3,576        2,518           326            2,078
      1,873        20,859       12,871        9,895       3,430        5,584        2,380            --               --
      -----        ------       ------       ------       -----        -----        -----           ---            -----
      5,458        78,082       33,250       27,921       6,468        9,160        4,898           326            2,078
      =====        ======       ======       ======       =====        =====        =====           ===            =====
</TABLE>
 
                                      B-13
<PAGE>   128
 
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
 
NOTES TO FINANCIAL STATEMENTS
 
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
 
ORGANIZATION
 
Kemper Investors Life Insurance Company Variable Annuity Separate Account (the
"Separate Account") is a unit investment trust registered under the Investment
Company Act of 1940, as amended, established by Kemper Investors Life Insurance
Company ("KILICO"). KILICO is a wholly-owned subsidiary of Zurich Financial
Services ("ZFS"). ZFS was formed with the September 7, 1998 merger of the Zurich
Group with the financial services business of B.A.T. Industries. ZFS is owned by
Zurich Allied AG and Allied Zurich p.l.c., fifty-seven percent and forty-three
percent, respectively. Zurich Allied AG, representing the financial interest of
the former Zurich Group, is listed on the Swiss Market Index (SMI) replacing
Zurich. Allied Zurich p.l.c., representing the financial interest of the
financial services business of B.A.T. Industries, is included in the FTSE-100
Share Index in London.
 
   
The Separate Account is used to fund contracts or certificates (collectively
referred to as "contracts") for ADVANTAGE III periodic and flexible payment
variable annuity contracts, PASSPORT individual and group variable and market
value adjusted deferred annuity contracts and DESTINATIONS individual and group
variable, fixed and market value adjusted deferred annuity contracts. The
Separate Account is divided into a total of thirty-nine subaccounts with various
subaccount options available to Contract Owners depending upon their respective
Contracts. A total of only sixteen subaccount options are presented in the
accompanying financial statements, (the Money Market Subaccounts represent only
one subaccount), as available subaccount options to Contract Owners. ADVANTAGE
III Contract Owners have twelve additional subaccounts which invest exclusively
in the shares of subaccounts in the Janus Aspen Series, the Lexington Funds, and
the Fidelity VIP Funds which are not reflected in the accompanying financial
statements. DESTINATIONS Contract Owners have twelve additional subaccounts
which invest exclusively in the shares of subaccounts in the Investors Fund
Series, the Janus Aspen Series, the Scudder Variable Life Investment Funds, and
the Warburg Pincus Trust Funds which are also not reflected in the accompanying
financial statements. Each subaccount invests exclusively in the shares of a
corresponding portfolio of the Investors Fund Series, an open-end diversified
management investment company.
    
 
ESTIMATES
 
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent amounts at the date of the financial statements. As a
result, actual results reported as income and expenses could differ from the
estimates reported in the accompanying financial statements.
 
SECURITY VALUATION
 
The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 1998.
 
                                      B-14
<PAGE>   129
 
SECURITY TRANSACTIONS AND INVESTMENT INCOME
 
   
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Dividends and capital gains distributions are recorded as
income on the ex-dividend date. Realized gains and losses from security
transactions are reported on a first in, first out (FIFO) cost basis.
    
 
ACCUMULATION UNIT VALUATION
 
   
On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 p.m.
(Central time) or the close of the Exchange by dividing the total value of each
subaccount's investments and other assets, less liabilities, by the number of
accumulation units outstanding in the respective subaccount.
    
 
FEDERAL INCOME TAXES
 
   
The operations of the Separate Account are included in the federal income tax
return of KILICO. Under existing federal income tax law, investment income and
realized capital gains and losses of the Separate Account increase liabilities
under the contract and are, therefore, not taxed. Thus the Separate Account may
realize net investment income and capital gains and losses without federal
income tax consequences.
    
 
(2) SUMMARY OF INVESTMENTS
 
Investments, at cost, at December 31, 1998, are as follows (in thousands):
 
   
<TABLE>
<CAPTION>
                                                              SHARES
                                                               OWNED       COST
                                                              -------   ----------
<S>                                                           <C>       <C>
INVESTMENTS
INVESTORS FUND SERIES:
Money Market Subaccount (Money Market and Money Market #2
  Subaccounts)..............................................  111,685   $  111,685
Total Return Subaccount.....................................  264,617      628,630
High Yield Subaccount.......................................  214,127      260,208
Growth Subaccount...........................................  182,099      483,911
Government Securities Subaccount............................   64,938       76,630
International Subaccount....................................  105,017      121,917
Small Cap Growth Subaccount.................................   73,037      124,454
Investment Grade Bond Subaccount............................    9,866       11,134
Contrarian Value Subaccount.................................   54,611       78,889
Small Cap Value Subaccount..................................   31,336       35,661
Value+Growth Subaccount.....................................   28,166       39,668
Horizon 20+ Subaccount......................................    6,121        7,879
Horizon 10+ Subaccount......................................   11,087       13,540
Horizon 5 Subaccount........................................    5,228        6,245
Global Income Subaccount....................................    1,287        1,367
Blue Chip Subaccount........................................    6,981        8,151
                                                                        ----------
        TOTAL INVESTMENTS AT COST...........................            $2,009,969
                                                                        ==========
</TABLE>
    
 
   
A description of the underlying investments of the subaccounts are summarized
below.
    
 
   
MONEY MARKET SUBACCOUNT: This subaccount seeks maximum current income to the
extent consistent with stability of principal from a portfolio of high quality
money market instruments. The Portfolio seeks to maintain a net asset value of
$1.00 per share, but there is no assurance that the Portfolio will be able to do
so. The Money Market Subaccount represents the ADVANTAGE III Money Market
Subaccount and the PASSPORT and DESTINATIONS Money Market Subaccount #1. Money
Market Subaccount #2 represents funds allocated by the owner of a contract to
the dollar cost averaging program. Under the dollar
    
 
                                      B-15
<PAGE>   130
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
(2) SUMMARY OF INVESTMENTS (CONTINUED)
   
cost averaging ("DCA") program, an owner may predesignate a portion of the
subaccount value to be automatically transferred on a monthly basis to one or
more of the other subaccounts. This option is only available to PASSPORT
individual and group variable and market value adjusted deferred annuity
contracts and DESTINATIONS individual and group variable, fixed and market value
adjusted deferred annuity contracts.
    
 
   
TOTAL RETURN SUBACCOUNT: This subaccount seeks a high total return, a
combination of income and capital appreciation, consistent with reasonable risk.
    
 
   
HIGH YIELD SUBACCOUNT: This subaccount seeks to provide a high level of current
income.
    
 
GROWTH SUBACCOUNT: This subaccount seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
 
   
GOVERNMENT SECURITIES SUBACCOUNT: This subaccount seeks high current return
consistent with preservation of capital.
    
 
INTERNATIONAL SUBACCOUNT: This subaccount seeks total return, a combination of
capital growth and income, principally through an internationally diversified
portfolio of equity securities.
 
   
SMALL CAP GROWTH SUBACCOUNT: This subaccount seeks maximum appreciation of
investors' capital.
    
 
   
INVESTMENT GRADE BOND SUBACCOUNT: This subaccount seeks high current income.
    
 
   
CONTRARIAN VALUE SUBACCOUNT: This subaccount seeks to achieve a high rate of
total return.
    
 
   
SMALL CAP VALUE SUBACCOUNT: This subaccount seeks long-term capital
appreciation.
    
 
   
VALUE+GROWTH SUBACCOUNT: This subaccount seeks growth of capital. A secondary
objective of the Portfolio is the reduction of risk over a full market cycle
compared to a portfolio of only growth stocks or only value stocks.
    
 
   
HORIZON 20+ SUBACCOUNT: This subaccount, designed for investors with
approximately a 20+ year investment horizon, seeks growth of capital, with
income as a secondary objective.
    
 
   
HORIZON 10+ SUBACCOUNT: This subaccount, designed for investors with
approximately a 10+year investment horizon, seeks a balance between growth of
capital and income, consistent with moderate risk.
    
 
   
HORIZON 5 SUBACCOUNT: This subaccount, designed for investors with approximately
a 5 year investment horizon, seeks income consistent with a preservation of
capital, with growth of capital as a secondary objective.
    
 
GLOBAL INCOME SUBACCOUNT: This subaccount seeks to provide high current income
consistent with prudent total return asset management.
 
BLUE CHIP SUBACCOUNT: This subaccount seeks growth of capital and of income.
 
(3) TRANSACTIONS WITH AFFILIATES
 
KILICO assumes mortality risks associated with the annuity contracts and incurs
all expenses involved in administering the contracts. In return, KILICO assesses
that portion of each subaccount representing assets under the ADVANTAGE III
flexible payment contracts with a daily charge for mortality and expense risk
and administrative costs which amounts to an aggregate of one percent (1.00%)
per annum. KILICO also assesses that portion of each subaccount representing
assets under the ADVANTAGE III periodic payment contracts with a daily asset
charge for mortality and expense risk and administrative costs which amounts to
 
                                      B-16
<PAGE>   131
 
   
an aggregate of one and three-tenths percent (1.30%) per annum. KILICO assesses
that portion of each subaccount representing assets under PASSPORT individual
and group variable and market value adjusted deferred annuity contracts with a
daily asset charge for mortality and expense risk and administrative costs which
amounts to an aggregate of one and one-quarter percent (1.25%) per annum. KILICO
assesses that portion of each subaccount representing assets under DESTINATIONS
individual and group variable, fixed and market value adjusted deferred annuity
contracts with a daily asset charge for mortality and expense risk and
administrative costs which amounts to an aggregate of one and four-tenths
percent (1.40%) per annum. The PASSPORT and DESTINATIONS DCA Money Market
Subaccount #2, available for participation in the dollar cost averaging program,
has no daily asset charge deduction. For the year ended December 31, 1998, asset
charges totaled $25,943,505, $7,117,285 and $81,806 for ADVANTAGE III, PASSPORT
and DESTINATIONS contracts, respectively.
    
 
   
KILICO also assesses against each ADVANTAGE III contract participating in one or
more of the subaccounts at any time during the year a records maintenance
charge. For contracts purchased prior to June 1, 1993, the charge is $25 and is
assessed on December 31st of each calendar year. For contracts purchased June 1,
1993 and subsequent, the charge is $36 and is assessed ratably every quarter of
each calendar year, except in those states which have yet to approve these
contract changes. The charge is assessed whether or not any purchase payments
have been made during the year. KILICO also assesses against each PASSPORT and
DESTINATIONS contract participating in one or more of the subaccounts a records
maintenance charge of $30 at the end of each contract year. The records
maintenance charge for ADVANTAGE III, PASSPORT and DESTINATIONS contracts are
waived for all individual contracts whose investment value exceeds $50,000 on
the date of assessment. For the year ended December 31, 1998, records
maintenance charges totaled $2,044,611, $151,021 and $60 for ADVANTAGE III,
PASSPORT and DESTINATION contracts, respectively.
    
 
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Money Market, Total Return, High Yield, and Growth
Subaccounts whose direct and indirect operating expenses exceed eighty
hundredths of one percent (.80%) of average daily net assets. In determining
reimbursement of direct and indirect operating expenses, for each subaccount,
charges for mortality and expense risks and administrative expenses, and records
maintenance charges are excluded and, for each subaccount, charges for taxes,
extraordinary expenses, and brokerage and transaction costs are excluded. During
the year December 31, 1998, no such payment was made.
 
   
KILICO assesses an optional annual charge for the Guaranteed Retirement Income
Benefit ("GRIB"), related to the DESTINATIONS contracts. The annual charge of
 .25% of Contract Value, if taken, will be deducted pro rata from each invested
subaccount on each Contract Quarter anniversary. For the year ended December 31,
1998, GRIB charges totaled $9,477.
    
 
Proceeds payable on the redemption of units are reduced by the amount of any
applicable contingent deferred sales charge due to KILICO.
 
Scudder Kemper Investments, Inc., an affiliated company, is the investment
manager of the Investors Fund Series portfolios.
 
Investors Brokerage Services, Inc., a wholly-owned subsidiary of KILICO, is the
principal underwriter for the Separate Account.
 
                                      B-17
<PAGE>   132
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
(4) NET TRANSFERS (TO) FROM AFFILIATE AND SUBACCOUNTS
 
   
Net transfers (to) from affiliate or subaccounts include transfers of all or
part of the Contract Owner's interest to or from another eligible subaccount or
to the general account of KILICO.
    
 
(5) CONTRACT OWNERS' EQUITY
 
The Contract Owners' equity is affected by the investment results of, and
contract charges to, each subaccount. The accompanying financial statements
include only Contract Owners' payments pertaining to the variable portions of
their contracts and exclude any payments for the market value adjusted or fixed
portions, the latter being included in the general account of KILICO. Contract
Owners may elect to annuitize the contract under one of several annuity options,
as specified in the prospectus.
 
Contract Owners' equity at December 31, 1998, is as follows (in thousands,
except unit value; differences are due to rounding):
 
<TABLE>
<CAPTION>
                                                                                                  CONTRACT
                                                                 NUMBER           UNIT            OWNERS'
                                                                OF UNITS          VALUE            EQUITY
                                                                --------         -------         ----------
<S>                                                             <C>              <C>             <C>
                                 ADVANTAGE III CONTRACTS
MONEY MARKET SUBACCOUNT
  Flexible Payment, Qualified...............................        309          $ 2.493         $      770
  Flexible Payment, Nonqualified............................      3,812            2.493              9,502
  Periodic Payment, Qualified...............................     14,508            2.372             34,415
  Periodic Payment, Nonqualified............................     11,095            2.372             26,316
                                                                                                 ----------
                                                                                                     71,003
                                                                                                 ----------
TOTAL RETURN SUBACCOUNT
  Flexible Payment, Qualified...............................        772            7.411              5,719
  Flexible Payment, Nonqualified............................      3,348            6.862             22,973
  Periodic Payment, Qualified...............................     72,971            7.052            514,620
  Periodic Payment, Nonqualified............................     11,360            6.571             74,644
                                                                                                 ----------
                                                                                                    617,956
                                                                                                 ----------
HIGH YIELD SUBACCOUNT
  Flexible Payment, Qualified...............................        260            6.369              1,655
  Flexible Payment, Nonqualified............................      1,480            6.098              9,025
  Periodic Payment, Qualified...............................     20,199            6.061            122,423
  Periodic Payment, Nonqualified............................      6,036            5.904             35,637
                                                                                                 ----------
                                                                                                    168,740
                                                                                                 ----------
GROWTH SUBACCOUNT
  Flexible Payment, Qualified...............................        178            7.261              1,292
  Flexible Payment, Nonqualified............................      1,063            7.236              7,692
  Periodic Payment, Qualified...............................     50,548            6.945            351,046
  Periodic Payment, Nonqualified............................      9,612            6.935             66,657
                                                                                                 ----------
                                                                                                    426,687
                                                                                                 ----------
GOVERNMENT SECURITIES SUBACCOUNT
  Flexible Payment, Qualified...............................        146            1.828                266
  Flexible Payment, Nonqualified............................      1,073            1.828              1,962
  Periodic Payment, Qualified...............................     16,997            1.779             30,243
  Periodic Payment, Nonqualified............................     10,270            1.779             18,273
                                                                                                 ----------
                                                                                                     50,744
                                                                                                 ----------
</TABLE>
 
                                      B-18
<PAGE>   133
 
<TABLE>
<CAPTION>
                                                                                                  CONTRACT
                                                                 NUMBER           UNIT            OWNERS'
                                                                OF UNITS          VALUE            EQUITY
                                                                --------         -------         ----------
<S>                                                             <C>              <C>             <C>
INTERNATIONAL SUBACCOUNT
  Flexible Payment, Qualified...............................        212          $ 1.877         $      398
  Flexible Payment, Nonqualified............................        744            1.877              1,397
  Periodic Payment, Qualified...............................     45,058            1.839             82,855
  Periodic Payment, Nonqualified............................      7,278            1.839             13,383
                                                                                                 ----------
                                                                                                     98,033
                                                                                                 ----------
SMALL CAP GROWTH SUBACCOUNT
  Flexible Payment, Qualified...............................        166            2.625                437
  Flexible Payment, Nonqualified............................        494            2.625              1,297
  Periodic Payment, Qualified...............................     38,394            2.589             99,412
  Periodic Payment, Nonqualified............................      4,843            2.589             12,540
                                                                                                 ----------
                                                                                                    113,686
                                                                                                 ----------
INVESTMENT GRADE BOND SUBACCOUNT
  Flexible Payment, Qualified...............................         19            1.187                 23
  Flexible Payment, Nonqualified............................        750            1.187                890
  Periodic Payment, Qualified...............................      2,529            1.178              2,978
  Periodic Payment, Nonqualified............................      1,033            1.178              1,216
                                                                                                 ----------
                                                                                                      5,107
                                                                                                 ----------
CONTRARIAN VALUE SUBACCOUNT
  Flexible Payment, Qualified...............................         94            1.777                168
  Flexible Payment, Nonqualified............................         80            1.777                142
  Periodic Payment, Qualified...............................     23,159            1.763             40,832
  Periodic Payment, Nonqualified............................      3,847            1.763              6,782
                                                                                                 ----------
                                                                                                     47,924
                                                                                                 ----------
SMALL CAP VALUE SUBACCOUNT
  Flexible Payment, Qualified...............................          4            1.072                  4
  Flexible Payment, Nonqualified............................         94            1.072                101
  Periodic Payment, Qualified...............................     12,832            1.063             13,643
  Periodic Payment, Nonqualified............................      1,756            1.063              1,867
                                                                                                 ----------
                                                                                                     15,615
                                                                                                 ----------
VALUE+GROWTH SUBACCOUNT
  Flexible Payment, Qualified...............................         60            1.683                101
  Flexible Payment, Nonqualified............................        173            1.683                291
  Periodic Payment, Qualified...............................      7,994            1.669             13,345
  Periodic Payment, Nonqualified............................      2,094            1.669              3,496
                                                                                                 ----------
                                                                                                     17,233
                                                                                                 ----------
HORIZON 20+ SUBACCOUNT
  Flexible Payment, Qualified...............................         21            1.530                 32
  Flexible Payment, Nonqualified............................         --            1.530                 --
  Periodic Payment, Qualified...............................      1,764            1.518              2,679
  Periodic Payment, Nonqualified............................        195            1.518                295
                                                                                                 ----------
                                                                                                      3,006
                                                                                                 ----------
HORIZON 10+ SUBACCOUNT
  Flexible Payment, Qualified...............................         13            1.410                 18
  Flexible Payment, Nonqualified............................          9            1.410                 12
  Periodic Payment, Qualified...............................      3,391            1.399              4,744
  Periodic Payment, Nonqualified............................        419            1.399                586
                                                                                                 ----------
                                                                                                      5,360
                                                                                                 ----------
</TABLE>
 
                                      B-19
<PAGE>   134
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
 
   
<TABLE>
<CAPTION>
                                                                                                  CONTRACT
                                                                 NUMBER           UNIT            OWNERS'
                                                                OF UNITS          VALUE            EQUITY
                                                                --------         -------         ----------
<S>                                                             <C>              <C>             <C>
HORIZON 5 SUBACCOUNT
  Flexible Payment, Qualified...............................         --          $ 1.320                 --
  Flexible Payment, Nonqualified............................         35            1.320         $       46
  Periodic Payment, Qualified...............................      1,248            1.310              1,635
  Periodic Payment, Nonqualified............................        357            1.310                468
                                                                                                 ----------
                                                                                                      2,149
                                                                                                 ----------
        TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY.........                                     $1,643,243
                                                                                                 ==========
 
                     PASSPORT CONTRACTS
MONEY MARKET #1 SUBACCOUNT
  Qualified.................................................      6,657          $ 1.245         $    8,289
  Nonqualified..............................................     21,661            1.245             26,976
                                                                                                 ----------
                                                                                                     35,265
                                                                                                 ----------
MONEY MARKET #2 SUBACCOUNT
  Qualified.................................................      1,442            1.358              1,958
  Nonqualified..............................................      1,870            1.358              2,540
                                                                                                 ----------
                                                                                                      4,498
                                                                                                 ----------
TOTAL RETURN SUBACCOUNT
  Qualified.................................................     14,282            1.917             27,374
  Nonqualified..............................................     46,822            1.917             89,744
                                                                                                 ----------
                                                                                                    117,118
                                                                                                 ----------
HIGH YIELD SUBACCOUNT
  Qualified.................................................     10,995            1.887             20,743
  Nonqualified..............................................     36,787            1.887             69,400
                                                                                                 ----------
                                                                                                     90,143
                                                                                                 ----------
GROWTH SUBACCOUNT
  Qualified.................................................     12,369            2.349             29,057
  Nonqualified..............................................     34,697            2.349             81,506
                                                                                                 ----------
                                                                                                    110,563
                                                                                                 ----------
GOVERNMENT SECURITIES SUBACCOUNT
  Qualified.................................................      4,337            1.437              6,231
  Nonqualified..............................................     14,321            1.437             20,573
                                                                                                 ----------
                                                                                                     26,804
                                                                                                 ----------
INTERNATIONAL SUBACCOUNT
  Qualified.................................................      5,866            1.845             10,825
  Nonqualified..............................................     19,399            1.845             35,794
                                                                                                 ----------
                                                                                                     46,619
                                                                                                 ----------
SMALL CAP GROWTH SUBACCOUNT
  Qualified.................................................      2,884            2,595              7,486
  Nonqualified..............................................      8,298            2,595             21,536
                                                                                                 ----------
                                                                                                     29,022
                                                                                                 ----------
</TABLE>
    
 
                                      B-20
<PAGE>   135
 
   
<TABLE>
<CAPTION>
                                                                                                  CONTRACT
                                                                 NUMBER           UNIT            OWNERS'
                                                                OF UNITS          VALUE            EQUITY
                                                                --------         -------         ----------
<S>                                                             <C>              <C>             <C>
INVESTMENT GRADE BOND SUBACCOUNT
  Qualified.................................................      1,230          $ 1.179         $    1,450
  Nonqualified..............................................      3,715            1.179              4,381
                                                                                                 ----------
                                                                                                      5,831
                                                                                                 ----------
CONTRARIAN VALUE SUBACCOUNT
  Qualified.................................................      6,817            1.765             12,036
  Nonqualified..............................................     19,663            1.765             34,715
                                                                                                 ----------
                                                                                                     46,751
                                                                                                 ----------
SMALL CAP VALUE SUBACCOUNT
  Qualified.................................................      4,178            1.065              4,448
  Nonqualified..............................................     11,505            1.065             12,248
                                                                                                 ----------
                                                                                                     16,696
                                                                                                 ----------
VALUE+GROWTH SUBACCOUNT
  Qualified.................................................      4,694            1.672              7,846
  Nonqualified..............................................     12,758            1.672             21,328
                                                                                                 ----------
                                                                                                     29,174
                                                                                                 ----------
HORIZON 20+ SUBACCOUNT
  Qualified.................................................      1,141            1.520              1,734
  Nonqualified..............................................      2,631            1.520              4,000
                                                                                                 ----------
                                                                                                      5,734
                                                                                                 ----------
HORIZON 10+ SUBACCOUNT
  Qualified.................................................      1,544            1.401              2,162
  Nonqualified..............................................      5,198            1.401              7,280
                                                                                                 ----------
                                                                                                      9,442
                                                                                                 ----------
HORIZON 5 SUBACCOUNT
  Qualified.................................................        394            1.311                517
  Nonqualified..............................................      2,992            1.311              3,924
                                                                                                 ----------
                                                                                                      4,441
                                                                                                 ----------
GLOBAL INCOME SUBACCOUNT
  Qualified.................................................         62            1.118                 69
  Nonqualified..............................................      1,144            1.118              1,280
                                                                                                 ----------
                                                                                                      1,349
                                                                                                 ----------
BLUE CHIP SUBACCOUNT
  Qualified.................................................      1,227            1.244              1,526
  Nonqualified..............................................      4,798            1.244              5,968
                                                                                                 ----------
                                                                                                      7,494
                                                                                                 ----------
        TOTAL PASSPORT CONTRACT OWNERS' EQUITY..............                                     $  586,944
                                                                                                 ==========
DESTINATIONS CONTRACTS
MONEY MARKET #1 SUBACCOUNT
  Qualified.................................................         20          $10.213         $      200
  Nonqualified..............................................         62           10.213                634
                                                                                                 ----------
                                                                                                        834
                                                                                                 ----------
MONEY MARKET #2 SUBACCOUNT
  Qualified.................................................         19           10.297                191
  Nonqualified..............................................          2           10.297                 20
                                                                                                 ----------
                                                                                                        211
                                                                                                 ----------
</TABLE>
    
 
                                      B-21
<PAGE>   136
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                                  CONTRACT
                                                                 NUMBER           UNIT            OWNERS'
                                                                OF UNITS          VALUE            EQUITY
                                                                --------         -------         ----------
<S>                                                             <C>              <C>             <C>
TOTAL RETURN SUBACCOUNT
  Qualified.................................................         38          $10.542         $      406
  Nonqualified..............................................         85           10.542                899
                                                                                                 ----------
                                                                                                      1,305
                                                                                                 ----------
HIGH YIELD SUBACCOUNT
  Qualified.................................................        121            9.646              1,166
  Nonqualified..............................................        240            9.646              2.313
                                                                                                 ----------
                                                                                                      3.479
                                                                                                 ----------
GROWTH SUBACCOUNT
  Qualified.................................................         24           10.007                239
  Nonqualified..............................................         26           10.007                256
                                                                                                 ----------
                                                                                                        495
                                                                                                 ----------
GOVERNMENT SECURITIES SUBACCOUNT
  Qualified.................................................         28           10.322                293
  Nonqualified..............................................         49           10.332                504
                                                                                                 ----------
                                                                                                        797
                                                                                                 ----------
INTERNATIONAL SUBACCOUNT
  Qualified.................................................         20            9.429                186
  Nonqualified..............................................         36            9.429                343
                                                                                                 ----------
                                                                                                        529
                                                                                                 ----------
SMALL CAP GROWTH SUBACCOUNT
  Qualified.................................................         34           11.070                378
  Nonqualified..............................................         72           11.070                795
                                                                                                 ----------
                                                                                                      1,173
                                                                                                 ----------
INVESTMENT GRADE BOND SUBACCOUNT
  Qualified.................................................         23           10.417                240
  Nonqualified..............................................         43           10.417                443
                                                                                                 ----------
                                                                                                        683
                                                                                                 ----------
CONTRARIAN VALUE SUBACCOUNT
  Qualified.................................................         31           10.712                334
  Nonqualified..............................................         79           10.712                841
                                                                                                 ----------
                                                                                                      1,175
                                                                                                 ----------
SMALL CAP VALUE SUBACCOUNT
  Qualified.................................................         50            8.431                419
  Nonqualified..............................................         75            8.431                636
                                                                                                 ----------
                                                                                                      1,055
                                                                                                 ----------
VALUE+GROWTH SUBACCOUNT
  Qualified.................................................         18           10.697                190
  Nonqualified..............................................         38           10.697                408
                                                                                                 ----------
                                                                                                        598
                                                                                                 ----------
HORIZON 20+ SUBACCOUNT
  Qualified.................................................         28           10.228                289
  Nonqualified..............................................         18           10.228                184
                                                                                                 ----------
                                                                                                        473
                                                                                                 ----------
</TABLE>
 
                                      B-22
<PAGE>   137
 
<TABLE>
<CAPTION>
                                                                                                  CONTRACT
                                                                 NUMBER           UNIT            OWNERS'
                                                                OF UNITS          VALUE            EQUITY
                                                                --------         -------         ----------
<S>                                                             <C>              <C>             <C>
HORIZON 10+ SUBACCOUNT
  Qualified.................................................         27          $10.290         $      275
  Nonqualified..............................................         35           10.290                362
                                                                                                 ----------
                                                                                                        637
                                                                                                 ----------
HORIZON 5 SUBACCOUNT
  Qualified.................................................          6           10.354                 59
  Nonqualified..............................................         16           10.354                168
                                                                                                 ----------
                                                                                                        227
                                                                                                 ----------
GLOBAL INCOME SUBACCOUNT
  Qualified.................................................          0           10.755                  2
  Nonqualified..............................................          7           10.755                 76
                                                                                                 ----------
                                                                                                         78
                                                                                                 ----------
BLUE CHIP SUBACCOUNT
  Qualified.................................................         35           10.386                360
  Nonqualified..............................................         90           10.386                930
                                                                                                 ----------
                                                                                                      1,290
                                                                                                 ----------
        TOTAL DESTINATIONS CONTRACT OWNERS' EQUITY..........                                     $   15,039
                                                                                                 ==========
</TABLE>
 
                                      B-23
<PAGE>   138
 
APPENDIX A
 
TABLE OF HISTORICAL HYPOTHETICAL* ACCUMULATION UNIT VALUES
AND PERFORMANCE INFORMATION
 
The historical accumulation unit values are for the life of the Separate Account
in its present organization as a unit investment trust and in its prior
organization as several managed separate accounts based on current deductions
and charges applicable to the Certificates. The Certificates were first offered
January 6, 1992. Values may have varied had assets actually been allocated to
the Separate Account under the Certificates.
 
HISTORICAL HYPOTHETICAL ACCUMULATION UNIT VALUES
 
   
<TABLE>
<CAPTION>
          KEMPER MONEY MARKET
             SUBACCOUNT #1
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
04/06/82  ...................   .521904
12/31/82  ...................   .561706
12/31/83  ...................   .605415
12/31/84  ...................   .661060
12/31/85  ...................   .705934
12/31/86  ...................   .743260
12/31/87  ...................   .782353
12/31/88  ...................   .830274
12/31/89  ...................   .894703
12/31/90  ...................   .955536
12/31/91  ...................   .999459
12/31/92  ...................  1.021027
12/31/93  ...................  1.037409
12/31/94  ...................  1.065127
12/31/95  ...................  1.111573
12/31/96  ...................  1.153353
12/31/97  ...................  1.199008
12/31/98  ...................  1.245376
</TABLE>
    
 
   
<TABLE>
<CAPTION>
          KEMPER MONEY MARKET
             SUBACCOUNT #2
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
04/06/82  ...................   .488861
12/31/82  ...................   .526477
12/31/83  ...................   .569164
12/31/84  ...................   .623384
12/31/85  ...................   .669150
12/31/86  ...................   .709261
12/31/87  ...................   .752167
12/31/88  ...................   .804725
12/31/89  ...................   .874829
12/31/90  ...................   .944037
12/31/91  ...................   .999255
12/31/92  ...................  1.033619
12/31/93  ...................  1.063332
12/31/94  ...................  1.105349
12/31/95  ...................  1.167919
12/31/96  ...................  1.227089
12/31/97  ...................  1.291613
12/31/98  ...................  1.358323
</TABLE>
    
 
   
<TABLE>
<CAPTION>
          KEMPER TOTAL RETURN
              SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
04/14/82  ...................   .271127
12/31/82  ...................   .334579
12/31/83  ...................   .388564
12/31/84  ...................   .364932
12/31/85  ...................   .462836
12/31/86  ...................   .526008
12/31/87  ...................   .522732
12/31/88  ...................   .578123
12/31/89  ...................   .707717
12/31/90  ...................   .734077
12/31/91  ...................   .997337
12/31/92  ...................  1.001657
12/31/93  ...................  1.109293
12/31/94  ...................   .991561
12/31/95  ...................  1.233678
12/31/96  ...................  1.422563
12/31/97  ...................  1.685450
12/31/98  ...................  1.916699
</TABLE>
    
 
   
<TABLE>
<CAPTION>
           KEMPER HIGH YIELD
              SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
04/14/82  ...................   .309713
12/31/82  ...................   .382894
12/31/83  ...................   .433711
12/31/84  ...................   .482077
12/31/85  ...................   .579127
12/31/86  ...................   .673071
12/31/87  ...................   .703823
12/31/88  ...................   .805071
12/31/89  ...................   .784945
12/31/90  ...................   .655406
12/31/91  ...................   .982658
12/31/92  ...................  1.142847
12/31/93  ...................  1.354484
12/31/94  ...................  1.307729
12/31/95  ...................  1.516342
12/31/96  ...................  1.707976
12/31/97  ...................  1.882768
12/31/98  ...................  1.886520
</TABLE>
    
 
   
<TABLE>
<CAPTION>
             KEMPER GROWTH
              SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>      
12/13/83  ...................   .336632
12/31/83  ...................   .346384
12/31/84  ...................   .378954
12/31/85  ...................   .468051
12/31/86  ...................   .504874
12/31/87  ...................   .507011
12/31/88  ...................   .502672
12/31/89  ...................   .636443
12/31/90  ...................   .632214
12/31/91  ...................   .995577
12/31/92  ...................  1.018405
12/31/93  ...................  1.152836
12/31/94  ...................  1.092975
12/31/95  ...................  1.435510
12/31/96  ...................  1.724222
12/31/97  ...................  2.066379
12/31/98  ...................  2.349101
</TABLE>
    
 
   
<TABLE>
<CAPTION>
     KEMPER GOVERNMENT SECURITIES
              SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
07/13/87  ...................   .700085
12/31/87  ...................   .710087
12/31/88  ...................   .723278
12/31/89  ...................   .811610
12/31/90  ...................   .881949
12/31/91  ...................  1.004106
12/31/92  ...................  1.050227
12/31/93  ...................  1.104499
12/31/94  ...................  1.060977
12/31/95  ...................  1.246817
12/31/96  ...................  1.262885
12/31/97  ...................  1.358996
12/31/98  ...................  1.436583
</TABLE>
    
 
                                      B-24
<PAGE>   139
 
   
<TABLE>
<CAPTION>
              KEMPER INTERNATIONAL SUBACCOUNT
-----------------------------------------------------------
                                                     UNIT
  DATE                                              VALUES
--------                                           --------
<S>                                                <C>
12/31/92  .......................................   .980721
12/31/93  .......................................  1.286576
12/31/94  .......................................  1.225134
12/31/95  .......................................  1.365361
12/31/96  .......................................  1.570689
12/31/97  .......................................  1.698099
12/31/98  .......................................  1.845192
</TABLE>
    
 
   
<TABLE>
<CAPTION>
            KEMPER SMALL CAP GROWTH SUBACCOUNT
-----------------------------------------------------------
                                                     UNIT
  DATE                                              VALUES
--------                                           --------
<S>                                                <C>
12/31/94  .......................................  1.030937
12/31/95  .......................................  1.324483
12/31/96  .......................................  1.674797
12/31/97  .......................................  2.219929
12/31/98  .......................................  2.595291
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                KEMPER
           INVESTMENT GRADE
            BOND SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
12/31/96  ...................  1.027174
12/31/97  ...................  1.106151
12/31/98  ...................  1.179189
</TABLE>
    
 
   
<TABLE>
<CAPTION>
        KEMPER CONTRARIAN VALUE
              SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                           <C>
12/31/96  ...................  1.163902
12/31/97  ...................  1.498831
12/31/98  ...................  1.765483
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                KEMPER
            SMALL CAP VALUE
              SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
12/31/96  ...................  1.010142
12/31/97  ...................  1.214542
12/31/98  ...................  1.064601
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                KEMPER
             VALUE+GROWTH
              SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
12/31/96  ...................  1.136559
12/31/97  ...................  1.408420
12/31/98  ...................  1.671674
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                KEMPER
              HORIZON 20+
              SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
12/31/96  ...................  1.144182
12/31/97  ...................  1.361426
12/31/98  ...................  1.519935
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                KEMPER
              HORIZON 10+
              SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
12/31/96  ...................  1.104505
12/31/97  ...................  1.273820
12/31/98  ...................  1.400638
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                KEMPER
         HORIZON 5 SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
12/31/96  ...................  1.086828
12/31/97  ...................  1.209733
12/31/98  ...................  1.311331
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                KEMPER
         BLUE CHIP SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
12/31/97  ...................  1.106221
12/31/98  ...................  1.243830
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                KEMPER
       GLOBAL INCOME SUBACCOUNT
---------------------------------------
                                 UNIT
  DATE                          VALUES
--------                       --------
<S>                            <C>
12/31/97  ...................  1.020218
12/31/98  ...................  1.118307
</TABLE>
    
 
---------------
* As of January 6, 1992 the accumulation unit values are based on actual
performance.
 
                                      B-25
<PAGE>   140
 
                              PERFORMANCE FIGURES
   
                           (AS OF DECEMBER 31, 1998)
    
 
   
<TABLE>
<CAPTION>
                                                                                                              STANDARDIZED
                                                                                                                AVERAGE
                                                                                        NONSTANDARDIZED          ANNUAL
                                                                                        TOTAL RETURN(1)          TOTAL
                                                                                    -----------------------    RETURN(2)
                                                        YEAR TO DATE                CUMULATIVE                ------------
                                                             (%)          ENDING       (%)       ANNUALIZED    ANNUALIZED
                                                          RETURN(3)      VALUE(4)     RETURN     (%) RETURN    (%) RETURN
                                                        ------------     --------   ----------   ----------    ----------
<S>                                                    <C>               <C>        <C>          <C>          <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT...................       17.79%
  Life of Subaccount (from 05/01/96).................                                                            20.72%
  Life of Portfolio (from 05/01/96)..................                    $70,580      76.45%       23.71%          N/A
  One Year...........................................                     47,102      17.76        17.76         10.46
KEMPER VALUE+GROWTH SUBACCOUNT.......................       18.69
  Life of Subaccount (from 05/01/96).................                                                            18.31
  Life of Portfolio (from 05/01/96)..................                     66,831      67.08        21.21           N/A
  One Year...........................................                     47,463      18.66        18.66         11.39
KEMPER HORIZON 20+ SUBACCOUNT........................       11.64
  Life of Subaccount (from 05/01/96).................                                                            13.68
  Life of Portfolio (from 05/01/96)..................                     60,748      51.87        16.95           N/A
  One Year...........................................                     44,640      11.60        11.60          4.28
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                            COMPARED TO
                                  -----------------------------------------------------------------------------------------------
                                    DOW JONES       DOW JONES      STANDARD &      STANDARD &        CONSUMER         CONSUMER
                                  INDUSTRIAL(5)   INDUSTRIAL(5)   POOR'S 500(6)   POOR'S 500(6)   PRICE INDEX(7)   PRICE INDEX(7)
                                  CUMULATIVE %    ANNUALIZED %    CUMULATIVE %    ANNUALIZED %     CUMULATIVE %     ANNUALIZED %
                                     RETURN          RETURN          RETURN          RETURN           RETURN           RETURN
                                  -------------   -------------   -------------   -------------   --------------   --------------
<S>                               <C>             <C>             <C>             <C>             <C>              <C>
KEMPER CONTRARIAN VALUE
  SUBACCOUNT
  Life of Portfolio (from
    05/01/96)...................      70.51           22.98           92.24           28.83
  One Year......................      18.13           18.13           28.58           28.58            1.61             1.61
KEMPER VALUE+GROWTH SUBACCOUNT
  Life of Portfolio (from
    05/01/96)...................      70.51           22.98           92.24           28.83
  One Year......................      18.13           18.13           28.58           28.58            1.61             1.61
KEMPER HORIZON 20+ SUBACCOUNT
  Life of Portfolio (from
    05/01/96)...................      70.51           22.98           92.24           28.83
  One Year......................      18.13           18.13           28.58           28.58            1.61             1.61
</TABLE>
    
 
The performance data quoted for the Subaccounts is based on past performance and
                        is not representative of future
  results. Investments return and principal value will fluctuate so that unit
                      values, when redeemed, may be worth
 more or less than their original cost. Information regarding the indexes used
                          for comparison were obtained
 from outside sources, have not been independently verified and do not reflect
                                the deduction of
   
    any Contract charges or fees. See page B-35 for additional information.
    
 
                                      B-26
<PAGE>   141
                              PERFORMANCE FIGURES
   
                           (AS OF DECEMBER 31, 1998)
    
                                  (CONTINUED)
 
   
<TABLE>
<CAPTION>
                                                                                                             STANDARDIZED
                                                                                                               AVERAGE
                                                                                                                ANNUAL
                                                                                  NONSTANDARDIZED               TOTAL
                                                                                  TOTAL RETURN(1)             RETURN(2)
                                                                          -------------------------------   --------------
                                            YEAR TO DATE (%)    ENDING    CUMULATIVE (%)   ANNUALIZED (%)   ANNUALIZED (%)
                                               RETURN(3)       VALUE(4)       RETURN           RETURN           RETURN
                                            ----------------   --------   --------------   --------------   --------------
<S>                                         <C>                <C>        <C>              <C>              <C>
KEMPER MONEY MARKET SUBACCOUNT(20)........        3.87%
  Life of Subaccount (from 04/06/82)......                                                                        4.26%
  Life of Portfolio (from 04/06/82).......                     $95,070        137.68%           5.31%              N/A
  Ten Years...............................                      60,752         51.88            4.27              2.05
  Five Years..............................                      48,110         20.27            3.76              0.93
  Three Years.............................                      45,195         12.99            4.15              0.30
  One Year................................                      41,528          3.82            3.82             -3.20
KEMPER HIGH YIELD SUBACCOUNT(19)..........        0.20
  Life of Subaccount (from 04/06/82)......                                                                       10.72
  Life of Portfolio (from 04/06/82).......                     236,918        492.30           11.22               N/A
  Ten Years...............................                      93,387        133.47            8.85              7.17
  Five Years..............................                      55,634         39.09            6.82              4.60
  Three Years.............................                      49,707         24.27            7.51              4.34
  One Year................................                      40,064          0.16            0.16             -6.39
KEMPER GOVERNMENT SECURITIES SUBACCOUNT...        5.71
  Life of Subaccount (from 11/03/89)......                                                                        4.99
  Life of Portfolio (from 09/03/87).......                      80,965        102.41            6.42               N/A
  Ten Years...............................                      79,226         98.06            7.07              5.83
  Five Years..............................                      51,933         29.83            5.36              3.12
  Three Years.............................                      46,033         15.08            4.79              1.65
  One Year................................                      42,269          5.67            5.67             -1.11
KEMPER INVESTMENT GRADE BOND SUBACCOUNT...        6.60
  Life of Subaccount (from 05/01/96)......                                                                        3.86
  Life of Portfolio (from 05/01/96).......                      47,144         17.86            6.35               N/A
  One Year................................                      42,632          6.58            6.58              0.25
KEMPER GLOBAL INCOME SUBACCOUNT(18).......        9.61
  Life of Subaccount (from 05/01/97)......                                                                        3.07
  Life of Portfolio (from 05/01/97).......                      44,722         11.81            6.92               N/A
  One Year................................                      43,838          9.60            9.60              3.29
</TABLE>
    
 
The performance data quoted for the Subaccounts is based on past performance and
                        is not representative of future
  results. Investments return and principal value will fluctuate so that unit
                      values, when redeemed, may be worth
 more or less than their original cost. Information regarding the indexes used
                          for comparison were obtained
 from outside sources, have not been independently verified and do not reflect
                                the deduction of
   
    any Contract charges or fees. See page B-35 for additional information.
    
 
                                      B-27
<PAGE>   142
                              PERFORMANCE FIGURES
                           (AS OF DECEMBER 31, 1998)
                                  (CONTINUED)
   
<TABLE>
<CAPTION>
                                                                   COMPARED TO
                           --------------------------------------------------------------------------------------------
                                                                                             MERRILL
                                                                                              LYNCH       MERRILL LYNCH
                                                               CDA CERT       CDA CERT      HIGH YIELD     HIGH YIELD
                              CONSUMER         CONSUMER       OF DEPOSIT     OF DEPOSIT       MASTER         MASTER
                           PRICE INDEX(7)   PRICE INDEX(7)     INDEX(8)       INDEX(8)       INDEX(9)       INDEX(9)
                            CUMULATIVE %     ANNUALIZED %    CUMULATIVE %   ANNUALIZED %   CUMULATIVE %   ANNUALIZED %
                               RETURN           RETURN          RETURN         RETURN         RETURN         RETURN
                           --------------   --------------   ------------   ------------   ------------   -------------
<S>                        <C>              <C>              <C>            <C>            <C>            <C>
KEMPER MONEY MARKET
  SUBACCOUNT(20)
  Life of Portfolio (from
    04/06/82)............        N/A              N/A           178.48%         6.34%            N/A            N/A
  Ten Years..............      36.02             3.12            65.18          5.15          180.09          10.85
  Five Years.............      12.41             2.37            26.32          4.78           55.46           9.23
  Three Years............       6.78             2.21            15.78          5.01           45.69          13.36
  One Year...............       1.61             1.61             5.12          5.12           12.96          12.96
KEMPER HIGH YIELD
  SUBACCOUNT(19)
  Life of Portfolio (from
    04/06/82)............        N/A              N/A              N/A           N/A             N/A            N/A
  Ten Years..............      36.02             3.12              N/A           N/A             N/A            N/A
  Five Years.............      12.41             2.37              N/A           N/A             N/A            N/A
  Three Years............       6.78             2.21              N/A           N/A             N/A            N/A
  One Year...............       1.61             1.61              N/A           N/A             N/A            N/A
KEMPER GOVERNMENT
  SECURITIES SUBACCOUNT
  Life of Portfolio (from
    09/03/87)............        N/A              N/A              N/A           N/A          228.15          11.14
  Ten Years..............      36.02             3.12              N/A           N/A
  Five Years.............      12.41             2.37              N/A           N/A
  Three Years............       6.78             2.21              N/A           N/A
  One Year...............       1.61             1.61              N/A           N/A
KEMPER INVESTMENT GRADE
  BOND SUBACCOUNT
  Life of Portfolio (from
    05/01/96)............                                          N/A           N/A           27.06           9.73
  One Year...............       1.61             1.61              N/A           N/A
KEMPER GLOBAL INCOME
  SUBACCOUNT(18)
  Life of Portfolio (from
    05/01/97)............                                          N/A           N/A             N/A            N/A
 
<CAPTION>
                                   COMPARED TO
                           ---------------------------
 
                           LEHMAN BROS.   LEHMAN BROS.
                            GOVT/CORP      GOVT/CORP
                               BOND           BOND
                            INDEX(10)      INDEX(10)
                           CUMULATIVE %   ANNUALIZED %
                              RETURN         RETURN
                           ------------   ------------
<S>                        <C>            <C>
KEMPER MONEY MARKET
  SUBACCOUNT(20)
  Life of Portfolio (from
    04/06/82)............         N/A          N/A
  Ten Years..............         N/A          N/A
  Five Years.............         N/A          N/A
  Three Years............         N/A          N/A
  One Year...............         N/A          N/A
KEMPER HIGH YIELD
  SUBACCOUNT(19)
  Life of Portfolio (from
    04/06/82)............         N/A          N/A
  Ten Years..............      144.10         9.33
  Five Years.............       42.26         7.30
  Three Years............       23.64         7.33
  One Year...............        9.47         9.47
KEMPER GOVERNMENT
  SECURITIES SUBACCOUNT
  Life of Portfolio (from
    09/03/87)............         N/A          N/A
  Ten Years..............      144.10         9.33
  Five Years.............       42.26         7.30
  Three Years............       23.64         7.33
  One Year...............        9.47         9.47
KEMPER INVESTMENT GRADE
  BOND SUBACCOUNT
  Life of Portfolio (from
    05/01/96)............
  One Year...............        9.47         9.47
KEMPER GLOBAL INCOME
  SUBACCOUNT(18)
  Life of Portfolio (from
    05/01/97)............
</TABLE>
    
 
The performance data quoted for the Subaccounts is based on past performance and
                        is not representative of future
   results. Investment return and principal value will fluctuate so that unit
                      values, when redeemed, may be worth
 more or less than their original cost. Information regarding the indexes used
                          for comparison were obtained
 from outside sources, have not been independently verified and do not reflect
                                the deduction of
   
    any Contract charges or fees. See page B-35 for additional information.
    
                                      B-28
<PAGE>   143
                              PERFORMANCE FIGURES
                           (AS OF DECEMBER 31, 1998)
                                  (CONTINUED)
   
<TABLE>
<CAPTION>
                                                                          COMPARED TO
                                     --------------------------------------------------------------------------------------
                                                                            LEHMAN BROS      LEHMAN BROS      LEHMAN BROS
                                      MERRILL LYNCH      MERRILL LYNCH          LONG             LONG          GOVT/CORP
                                        GOVT/CORP          GOVT/CORP         GOVT/CORP        GOVT/CORP         1-3 YEAR
                                     MASTER INDEX(11)   MASTER INDEX(11)   BOND INDEX(12)   BOND INDEX(12)   BOND INDEX(13)
                                       CUMULATIVE %       ANNUALIZED %      CUMULATIVE %     ANNUALIZED %     CUMULATIVE %
                                          RETURN             RETURN            RETURN           RETURN           RETURN
                                     ----------------   ----------------   --------------   --------------   --------------
<S>                                  <C>                <C>                <C>              <C>              <C>
KEMPER MONEY MARKET SUBACCOUNT(20)
  Life of Portfolio (from
    04/06/82)......................          N/A               N/A                N/A             N/A              N/A
  Ten Years........................          N/A               N/A                N/A             N/A              N/A
  Five Years.......................          N/A               N/A                N/A             N/A              N/A
  Three Years......................          N/A               N/A                N/A             N/A              N/A
  One Year.........................          N/A               N/A                N/A             N/A              N/A
KEMPER HIGH YIELD SUBACCOUNT(19)
  Life of Portfolio (from
    04/06/82)......................          N/A               N/A                N/A             N/A              N/A
  Ten Years........................       144.55              9.35                N/A             N/A              N/A
  Five Years.......................        42.50              7.34                N/A             N/A              N/A
  Three Years......................        23.81              7.38                N/A             N/A              N/A
  One Year.........................         9.53              9.53                N/A             N/A              N/A
KEMPER GOVERNMENT SECURITIES
  SUBACCOUNT
  Life of Portfolio (from
    09/03/87)......................          N/A               N/A             256.65           11.97              N/A
  Ten Years........................       144.55              9.35
  Five Years.......................        42.50              7.34                                                 N/A
  Three Years......................        23.81              7.38                                                 N/A
  One Year.........................         9.53              9.53                                                 N/A
KEMPER INVESTMENT GRADE BOND
  SUBACCOUNT
  Life of Portfolio (from
    05/01/96)......................          N/A               N/A                N/A             N/A              N/A
  One Year.........................         9.53              9.53                N/A             N/A              N/A
KEMPER GLOBAL INCOME PORTFOLIO(18)
  Life of Portfolio (from
    05/01/97)......................          N/A               N/A                N/A             N/A              N/A
 
<CAPTION>
                                      COMPARED TO
                                     --------------
                                      LEHMAN BROS
                                       GOVT/CORP
                                        1-3 YEAR
                                     BOND INDEX(13)
                                      ANNUALIZED %
                                         RETURN
                                     --------------
<S>                                  <C>
KEMPER MONEY MARKET SUBACCOUNT(20)
  Life of Portfolio (from
    04/06/82)......................        N/A
  Ten Years........................        N/A
  Five Years.......................        N/A
  Three Years......................        N/A
  One Year.........................        N/A
KEMPER HIGH YIELD SUBACCOUNT(19)
  Life of Portfolio (from
    04/06/82)......................        N/A
  Ten Years........................        N/A
  Five Years.......................        N/A
  Three Years......................        N/A
  One Year.........................        N/A
KEMPER GOVERNMENT SECURITIES
  SUBACCOUNT
  Life of Portfolio (from
    09/03/87)......................        N/A
  Ten Years........................
  Five Years.......................        N/A
  Three Years......................        N/A
  One Year.........................        N/A
KEMPER INVESTMENT GRADE BOND
  SUBACCOUNT
  Life of Portfolio (from
    05/01/96)......................        N/A
  One Year.........................        N/A
KEMPER GLOBAL INCOME PORTFOLIO(18)
  Life of Portfolio (from
    05/01/97)......................        N/A
</TABLE>
    
 
The performance data quoted for the Subaccounts is based on past performance and
                        is not representative of future
   results. Investment return and principal value will fluctuate so that unit
                      values, when redeemed, may be worth
 more or less than their original cost. Information regarding the indexes used
                          for comparison were obtained
 from outside sources, have not been independently verified and do not reflect
                                the deduction of
   
    any Contract charges or fees. See page B-35 for additional information.
    
                                      B-29
<PAGE>   144
                              PERFORMANCE FIGURES
                           (AS OF DECEMBER 31, 1998)
                                  (CONTINUED)
 
   
<TABLE>
<CAPTION>
                                                                                                              STANDARDIZED
                                                                                                                AVERAGE
                                                                                      NONSTANDARDIZED            ANNUAL
                                                                                      TOTAL RETURN(1)            TOTAL
                                                                                  ------------------------     RETURN(2)
                                                                                  CUMULATIVE    ANNUALIZED    ------------
                                           YEAR TO DATE(%)                           (%)           (%)         ANNUALIZED
                                              RETURN(3)        ENDING VALUE(4)      RETURN        RETURN       (%) RETURN
                                           ---------------     ---------------    ----------    ----------     ----------
<S>                                        <C>                 <C>                <C>           <C>           <C>
KEMPER GROWTH SUBACCOUNT...............         13.68%
  Life of Subaccount (from 12/09/83)...                                                                          13.14%
  Life of Portfolio (from 12/09/83)....                           $278,184          595.46%       13.74%           N/A
  Ten Years............................                            186,451          366.13        16.64          15.42
  Five Years...........................                             81,380          103.45        15.26          13.05
  Three Years..........................                             65,390           63.47        17.80          14.54
  One Year.............................                             45,457           13.64        13.64           6.39
</TABLE>
    
   
<TABLE>
<CAPTION>
                                                                   COMPARED TO
                        -------------------------------------------------------------------------------------------------
                                                                                               STANDARD &     STANDARD &
                                                                                                 POOR'S         POOR'S
                          STANDARD &       STANDARD &        CONSUMER          CONSUMER          MIDCAP         MIDCAP
                        POOR'S 500 (6)   POOR'S 500 (6)   PRICE INDEX (7)   PRICE INDEX (7)    INDEX (14)     INDEX (14)
                         CUMULATIVE %     ANNUALIZED %     CUMULATIVE %      ANNUALIZED %     CUMULATIVE %   ANNUALIZED %
                            RETURN           RETURN           RETURN            RETURN           RETURN         RETURN
                        --------------   --------------   ---------------   ---------------   ------------   ------------
<S>                     <C>              <C>              <C>               <C>               <C>            <C>
KEMPER GROWTH
 SUBACCOUNT
 Life of Portfolio
   (from 12/09/83)....     1,081.74          17.90                                                  N/A           N/A
 Ten Years............       479.63          19.21             36.02              3.12           483.64         19.29
 Five Years...........       193.91          24.06             12.41              2.37           137.08         18.84
 Three Years..........       110.85          28.23              6.78              2.21            87.78         23.37
 One Year.............        28.58          28.58              1.61              1.61            19.11         19.11
 
<CAPTION>
                                COMPARED TO
                        ---------------------------
 
                           NASDAQ         NASDAQ
                        COMPOS (15)    COMPOS (15)
                        CUMULATIVE %   ANNUALIZED %
                           RETURN         RETURN
                        ------------   ------------
<S>                     <C>            <C>
KEMPER GROWTH
 SUBACCOUNT
 Life of Portfolio
   (from 12/09/83)....     687.04         14.74
 Ten Years............     474.94         19.11
 Five Years...........     182.27         23.06
 Three Years..........     108.40         27.73
 One Year.............      39.63         39.63
</TABLE>
    
 
The performance data quoted for the Subaccounts is based on past performance and
                        is not representative of future
  results. Investments return and principal value will fluctuate so that unit
                      values, when redeemed, may be worth
 more or less than their original cost. Information regarding the indexes used
                          for comparison were obtained
 from outside sources, have not been independently verified and do not reflect
                                the deduction of
   
    any Contract charges or fees. See page B-35 for additional information.
    
                                      B-30
<PAGE>   145
                              PERFORMANCE FIGURES
                           (AS OF DECEMBER 31, 1998)
                                  (CONTINUED)
 
   
<TABLE>
<CAPTION>
                                                                                                              STANDARDIZED
                                                                                                                AVERAGE
                                                                                        NONSTANDARDIZED          ANNUAL
                                                                                        TOTAL RETURN(1)          TOTAL
                                                                                    -----------------------    RETURN(2)
                                                          YEAR TO DATE              CUMULATIVE                ------------
                                                              (%)         ENDING       (%)       ANNUALIZED    ANNUALIZED
                                                           RETURN(3)     VALUE(4)     RETURN     (%) RETURN    (%) RETURN
                                                          ------------   --------   ----------   ----------    ----------
<S>                                                       <C>            <C>        <C>          <C>          <C>
KEMPER SMALL CAP GROWTH.................................      16.91%
  Life of Subaccount (from 05/02/94)....................                                                          21.00%
  Life of Portfolio (from 05/02/94).....................                 $103,737     159.34%       22.65%          N/A
  Three Years...........................................                   78,328      95.82        25.11         22.25
  One Year..............................................                   46,752      16.88        16.88          9.89
KEMPER SMALL CAP VALUE SUBACCOUNT.......................     -12.35
  Life of Subaccount (from 05/01/96)....................                                                          -0.16
  Life of Portfolio (from 05/01/96).....................                   42,559       6.40         2.35           N/A
  One Year..............................................                   35,052     -12.37       -12.37        -17.73
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                              COMPARED TO
                                      -------------------------------------------------------------------------------------------
                                      CONSUMER PRICE   CONSUMER PRICE   RUSSELL 2000   RUSSELL 2000      NASDAQ         NASDAQ
                                         INDEX(7)         INDEX(7)       INDEX(16)      INDEX(16)      COMPOS(15)     COMPOS(15)
                                       CUMULATIVE %     ANNUALIZED %    CUMULATIVE %   ANNUALIZED %   CUMULATIVE %   ANNUALIZED %
                                          RETURN           RETURN          RETURN         RETURN         RETURN         RETURN
                                      --------------   --------------   ------------   ------------   ------------   ------------
<S>                                   <C>              <C>              <C>            <C>            <C>            <C>
KEMPER SMALL CAP GROWTH
  Life of Portfolio (from
    05/02/94).......................                                                                     198.25          26.88
  Three Years.......................        6.78            2.21            38.92          11.58         108.40          27.73
  One Year..........................        1.61            1.61            -2.55          -2.55          39.63          39.63
KEMPER SMALL CAP VALUE SUBACCOUNT
  Life of Portfolio (from
    05/01/96).......................                                                                      76.34          24.59
  One Year..........................        1.61            1.61            -2.55          -2.55          39.63          39.63
</TABLE>
    
 
The performance data quoted for the Subaccounts is based on past performance and
                        is not representative of future
  results. Investments return and principal value will fluctuate so that unit
                      values, when redeemed, may be worth
 more or less than their original cost. Information regarding the indexes used
                          for comparison were obtained
 from outside sources, have not been independently verified and do not reflect
                                the deduction of
   
    any Contract charges or fees. See page B-35 for additional information.
    
                                      B-31
<PAGE>   146
                              PERFORMANCE FIGURES
                           (AS OF DECEMBER 31, 1998)
                                  (CONTINUED)
 
   
<TABLE>
<CAPTION>
                                                                                                             STANDARDIZED
                                                                                                               AVERAGE
                                                                                                                ANNUAL
                                                                                 NONSTANDARDIZED                TOTAL
                                                                                 TOTAL RETURN(1)              RETURN(2)
                                                                         --------------------------------    ------------
                                   YEAR TO DATE(%)                       CUMULATIVE (%)    ANNUALIZED (%)     ANNUALIZED
                                      RETURN(3)       ENDING VALUE(4)        RETURN            RETURN         (%) RETURN
                                   ---------------    ---------------    --------------    --------------     ----------
<S>                                <C>                <C>                <C>               <C>               <C>
KEMPER INTERNATIONAL
  SUBACCOUNT(18)...............         8.66%
  Life of Subaccount (from
    01/06/92)..................                                                                                  8.05%
  Life of Portfolio (from
    01/06/92)..................                           $73,681            84.20%             9.13%             N/A
  Five Years...................                            57,276            43.19              7.44             5.34
  Three Years..................                            53,693            34.23             10.31             7.43
  One Year.....................                            43,453             8.63              8.63             2.02
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                                        COMPARED TO
                                                             ------------------------------------------------------------------
                                                              STANDARD &       STANDARD &      CONSUMER PRICE    CONSUMER PRICE
                                                             POOR'S 500(6)    POOR'S 500(6)       INDEX(7)          INDEX(7)
                                                             CUMULATIVE %     ANNUALIZED %      CUMULATIVE %      ANNUALIZED %
                                                                RETURN           RETURN            RETURN            RETURN
                                                             -------------    -------------    --------------    --------------
<S>                                                          <C>              <C>              <C>               <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)
  Life of Portfolio (from 01/06/92)......................       254.80            20.08
  Five Years.............................................       193.91            24.06            12.41              2.37
  Three Years............................................       110.85            28.23             6.78              2.21
  One Year...............................................        28.58            28.58             1.61              1.61
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                          COMPARED TO
                                              -------------------------------------------------------------------
                                                                                  MORGAN STANLEY   MORGAN STANLEY
                                              MORGAN STANLEY    MORGAN STANLEY    INTER'L WORLD    INTER'L WORLD
                                              EAFE INDEX (17)   EAFE INDEX (17)     INDEX (21)       INDEX (21)
                                               CUMULATIVE %      ANNUALIZED %      CUMULATIVE %     ANNUALIZED %
                                                  RETURN            RETURN            RETURN           RETURN
                                              ---------------   ---------------   --------------   --------------
<S>                                           <C>               <C>               <C>              <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)
  Life of Portfolio (from 01/06/92).........
  Five Years................................       55.23              9.19           107.19            15.68
  Three Years...............................       29.52              9.00            63.34            17.77
  One Year..................................       20.00             20.00            24.34            24.34
</TABLE>
    
 
The performance data quoted for the Subaccounts is based on past performance and
                        is not representative of future
   results. Investment return and principal value will fluctuate so that unit
                      values, when redeemed, may be worth
 more or less than their original cost. Information regarding the indexes used
                          for comparison were obtained
 from outside sources, have not been independently verified and do not reflect
                                the deduction of
   
    any Contract charges or fees. See page B-35 for additional information.
    
                                      B-32
<PAGE>   147
                              PERFORMANCE FIGURES
                           (AS OF DECEMBER 31, 1998)
                                  (CONTINUED)
 
   
<TABLE>
<CAPTION>
                                                                                                                    STANDARDIZED
                                                                                                                      AVERAGE
                                                                                                                       ANNUAL
                                                                                      NONSTANDARDIZED                  TOTAL
                                                                                      TOTAL RETURN(1)                RETURN(2)
                                                                             ----------------------------------    --------------
                                                YEAR TO DATE      ENDING     CUMULATIVE (%)     ANNUALIZED (%)     ANNUALIZED (%)
                                               (%) RETURN(3)     VALUE(4)        RETURN             RETURN             RETURN
                                               -------------     --------    --------------     --------------     --------------
<S>                                            <C>               <C>         <C>                <C>                <C>
KEMPER TOTAL RETURN SUBACCOUNT(19).........        13.72%
  Life of Subaccount (from 04/06/82).......                                                                             11.04%
  Life of Portfolio (from 04/06/82)........                      $263,276        558.19%             11.92%               N/A
  Ten Years................................                       132,472        231.18              12.72              11.12
  Five Years...............................                        68,982         72.46              11.52               9.04
  Three Years..............................                        62,073         55.18              15.77              12.33
  One Year.................................                        45,470         13.68              13.68               6.24
KEMPER HORIZON 10+ SUBACCOUNT..............         9.96
  Life of Subaccount (from 05/01/96).......                                                                             10.18
  Life of Portfolio (from 05/01/96)........                        55,978         39.94              13.42                N/A
  One Year.................................                        43,964          9.91               9.91               2.64
KEMPER HORIZON 5 SUBACCOUNT................         8.40
  Life of Subaccount (from 05/01/96).......                                                                              7.56
  Life of Portfolio (from 05/01/96)........                        52,410         31.03              10.66                N/A
  One Year.................................                        43,342          8.35               8.35               1.18
KEMPER BLUE CHIP SUBACCOUNT................        12.44
  Life of Subaccount (from 05/01/97).......                                                                              9.67
  Life of Portfolio (from 05/01/97)........                        49,739         24.35              13.95                N/A
  One Year.................................                        44,965         12.41              12.41               5.72
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                            COMPARED TO
                                  -----------------------------------------------------------------------------------------------
                                                                    CONSUMER        CONSUMER       LEHMAN BROS      LEHMAN BROS
                                   STANDARD &      STANDARD &         PRICE           PRICE       GOVT/CORP 1-3    GOVT/CORP 1-3
                                  POOR'S 500(6)   POOR'S 500(6)     INDEX(7)        INDEX(7)      YEAR BOND(13)    YEAR BOND(13)
                                  CUMULATIVE %    ANNUALIZED %    CUMULATIVE %    ANNUALIZED %     CUMULATIVE %     ANNUALIZED %
                                     RETURN          RETURN          RETURN          RETURN           RETURN           RETURN
                                  -------------   -------------   ------------    ------------    -------------    -------------
<S>                               <C>             <C>             <C>             <C>             <C>              <C>
KEMPER TOTAL RETURN
  SUBACCOUNT(19)
  Life of Portfolio (from
    04/06/82)...................    1,717.02          19.00             N/A             N/A              N/A             N/A
  Ten Years.....................      479.63          19.21           36.02            3.12           104.54            7.42
  Five Years....................      193.91          24.06           12.41            2.37            33.84            6.00
  Three Years...................      110.85          28.23            6.78            2.21            19.95            6.25
  One Year......................       28.58          28.58            1.61            1.61             6.96            6.96
KEMPER HORIZON 10+ SUBACCOUNT
  Life of Portfolio (from
    05/01/96)...................       92.24          28.83
  One Year......................       28.58          28.58            1.61            1.61             6.96            6.96
KEMPER HORIZON 5 SUBACCOUNT
  Life of Portfolio (from
    05/01/96)...................       92.24          28.83
  One Year......................       28.58          28.58            1.61            1.61             6.96            6.96
KEMPER BLUE CHIP SUBACCOUNT
  Life of Portfolio (from
    05/01/97)...................       48.55          28.26
</TABLE>
    
 
The performance data quoted for the Subaccounts is based on past performance and
                        is not representative of future
   results. Investment return and principal value will fluctuate so that unit
                      values, when redeemed, may be worth
 more or less than their original cost. Information regarding the indexes used
                          for comparison were obtained
 from outside sources, have not been independently verified and do not reflect
                                the deduction of
   
    any Contract charges or fees. See page B-35 for additional information.
    
                                      B-33
<PAGE>   148
                              PERFORMANCE FIGURES
                           (AS OF DECEMBER 31, 1998)
                                  (CONTINUED)
 
   
<TABLE>
<CAPTION>
                                                                          COMPARED TO
                                           -------------------------------------------------------------------------
                                             MERRILL LYNCH       MERRILL LYNCH       LEHMAN BROS       LEHMAN BROS
                                               GOVT/CORP           GOVT/CORP          GOVT/CORP         GOVT/CORP
                                           MASTER INDEX (11)   MASTER INDEX (11)   BOND INDEX (10)   BOND INDEX (10)
                                             CUMULATIVE %        ANNUALIZED %       CUMULATIVE %      ANNUALIZED %
                                                RETURN              RETURN             RETURN            RETURN
                                           -----------------   -----------------   ---------------   ---------------
<S>                                        <C>                 <C>                 <C>               <C>
KEMPER TOTAL RETURN SUBACCOUNT(19)
  Life of Portfolio (from 04/06/82)......          N/A                 N/A                N/A               N/A
  Ten Years..............................       144.55                9.35             144.10              9.33
  Five Years.............................        42.50                7.34              42.26              7.30
  Three Years............................        23.81                7.38              23.64              7.33
  One Year...............................         9.53                9.53               9.47              9.47
KEMPER HORIZON 10+ SUBACCOUNT
  Life of Portfolio (from 05/01/96)......
  One Year...............................         9.53                9.53               9.47              9.47
KEMPER HORIZON 5 SUBACCOUNT
  Life of Portfolio (from 05/01/96)......
  One Year...............................         9.53                9.53               9.47              9.47
KEMPER BLUE CHIP SUBACCOUNT
  Life of Portfolio (from 05/01/97)......
</TABLE>
    
 
The performance data quoted for the Subaccounts is based on past performance and
                        is not representative of future
   results. Investment return and principal value will fluctuate so that unit
                      values, when redeemed, may be worth
 more or less than their original cost. Information regarding the indexes used
                          for comparison were obtained
 from outside sources, have not been independently verified and do not reflect
                                the deduction of
   
    any Contract charges or fees. See page B-35 for additional information.
    
                                      B-34
<PAGE>   149
 
                           PERFORMANCE FIGURES--NOTES
 
  *  N/A Not Applicable
 
 (1) The Nonstandardized Total Return figures quoted are based on a hypothetical
     $40,000 initial investment and assumes the deduction of all recurring
     charges and fees applicable under the Contract except for the Withdrawal
     Charge and any charge for applicable premium taxes which may be imposed in
     certain states.
 
 (2) The Standardized Average Annual Total Return figures quoted are based on a
     hypothetical $1,000 initial investment and assumes the deduction of all
     recurring charges and fees applicable under the Contract including the
     applicable Withdrawal Charge that may be imposed at the end of the quoted
     period. Premium taxes are not reflected.
 
   
 (3) The Year to Date percentage return figures quoted are based on the change
     in unit values for the period January 1, 1998 through December 31, 1998.
    
 
 (4) The Ending Values quoted are based on a $10,000 initial investment and
     assumes the deduction of all recurring charges and fees applicable under
     the Contract except for the Withdrawal Charge and any charge for applicable
     premium taxes which may be imposed in certain states.
 
 (5) The Dow Jones Industrial Average is an unmanaged unweighted average of
     thirty blue chip industrial corporations listed on the New York Stock
     Exchange. Assumes reinvestment of dividends.
 
 (6) The Standard & Poor's 500 Stock Index is an unmanaged weighted average of
     500 stocks, over 95% of which are listed on the New York Stock Exchange.
     Assumes reinvestment of dividends.
 
 (7) The Consumer Price Index, published by the U.S. Bureau of Labor Statistics,
     is a statistical measure of change, over time, in the prices of goods and
     services in major expenditure groups.
 
 (8) The CDA Certificate of Deposit Index is provided by CDA Investment
     Technologies, Inc., Silver Spring, Maryland, and is based upon a
     statistical sampling of the yield of 30-day certificates of deposit of
     major commercial banks. Yield is based upon a monthly compounding of
     interest.
 
 (9) The Salomon Brothers High Grade Corporate Bond Index is on a total return
     basis with all dividends reinvested and is comprised of high grade
     long-term industrial and utility bonds rated in the top two rating
     categories.
 
(10) The Lehman Brothers Government/Corporate Bond Index is on a total return
     basis and is comprised of all publicly issued, non-convertible, domestic
     debt of the U.S. Government or any agency thereof, quasi-Federal
     corporation, or corporate debt guaranteed by the U.S. Government and all
     publicly issued, fixed-rate, non-convertible, domestic debt of the three
     major corporate classifications: industrial, utility, and financial. Only
     notes and bonds with a minimum outstanding principal amount of $1,000,000
     and a minimum of one year are included. Bonds included must have a rating
     of at least Baa by Moody's Investors Service, BBB by Standard & Poor's
     Corporation or in the case of bank bonds not rated by either Moody's or
     Standard & Poor's, BBB by Fitch Investors Service.
 
(11) The Merrill Lynch Government/Corporate Master Index is based upon the total
     returns with all dividends reinvested of 4,000 corporate and 300 government
     bonds issued with an intermediate average maturity and an average quality
     rating of Aa (Moody's Investors Service, Inc.) /AA (Standard & Poor's
     Corporation).
 
(12) The Lehman Brothers Long Government/Corporate Bond Index is composed of all
     bonds covered by the Lehman Brothers Government/Corporate Bond Index with
     maturities of 10 years or greater. Total return comprises price
     appreciation/depreciation and income as a percentage of the original
     investment. Indexes are balanced monthly by market capitalization.
 
(13) The Lehman Brothers Government/Corporate 1-3 Year Bond Index is composed of
     all bonds covered by the Lehman Brothers Government/Corporate Bond Index
     with maturities between one and three years.
 
(14) The Standard & Poor's Midcap 400 Index is a capitalization-weighted index
     that measures the performance of the mid-range sector of the U.S. stock
     market where the median market capitalization is approximately $700
     million. The index was developed with a base level of 100 as of December
     31, 1990.
 
(15) The NASDAQ Composite Index is a broad-based capitalization-weighted index
     of all NASDAQ stocks. The index was developed with a base level of 100 as
     of February 5, 1971.
 
(16) The Russell 2000 Index is comprised of the smallest 2000 companies in the
     Russell 3000 Index, representing approximately 11% of the Russell 3000
     total market capitalization. The index was developed with a base value of
     135.00 as of December 31, 1986.
 
(17) The Morgan Stanley EAFE is the Morgan Stanley Capital International Europe,
     Australia, Far East index. This index is an unmanaged index that is
     considered to be generally representative of major non-United States stock
     markets.
 
(18) There are special risks associated with investing in non-U.S. companies,
     including fluctuating foreign currency exchange rates, foreign governmental
     regulations and differing degrees of liquidity that may adversely affect
     portfolio securities.
 
                                      B-35
<PAGE>   150
 
(19) The high yield potential offered by these Subaccounts reflect the
     substantial risks associated with investments in high-yield bonds.
 
(20) An investment in the Kemper Money Market Subaccount is neither insured nor
     guaranteed by the U.S. government. There can be no assurance that the
     Kemper Money Market Portfolio will be able to maintain a stable net asset
     value of $1.00 per share.
 
(21) The Morgan Stanley International World Index is an arithmetic, market
     value-weighted average of the performance of over 1,470 securities listed
     on the stock exchanges of Australia, Austria, Belgium, Canada, Denmark,
     Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New
     Zealand, Norway, Singapore/Malaysia, South Africa Gold, Spain, Switzerland,
     United Kingdom, and the United States. The index is calculated on a total
     return basis, which includes reinvestment of gross dividends before
     deduction of withholding taxes. The index covers about 60% of the issues
     listed on the exchanges of the countries included.
 
TAX-DEFERRED ACCUMULATION
 
<TABLE>
<CAPTION>
                                  NON-QUALIFIED                    CONVENTIONAL
                                     ANNUITY                       SAVINGS PLAN
                             AFTER-TAX CONTRIBUTIONS
                            AND TAX-DEFERRED EARNINGS
                         --------------------------------
                                            TAXABLE LUMP      AFTER-TAX CONTRIBUTIONS
                         NO WITHDRAWALS    SUM WITHDRAWAL      AND TAXABLE EARNINGS
                         --------------    --------------     -----------------------
<S>                      <C>               <C>               <C>
10 Years.............       $107,946          $ 86,448               $ 81,693
20 Years.............        233,048           165,137                133,476
30 Years.............        503,133           335,021                218,082
</TABLE>
 
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Certificates. Income
on Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10%
tax penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following charges and expenses under
Kemper Passport: 1.10% mortality and expense risk; .15% administration charges;
6% maximum deferred withdrawal charge; and $30 annual records maintenance
charge. The tax-deferred accumulation would be reduced if these charges were
reflected. No implication is intended by the use of these assumptions that the
return shown is guaranteed in any way or that the return shown represents an
average or expected rate of return over the period of the Contracts.
[IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]
 
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
 
                                      B-36
<PAGE>   151
 
APPENDIX B
 
STATE PREMIUM TAX CHART
 
<TABLE>
<CAPTION>
                                                                              RATE OF TAX
                                                                    -------------------------------
                                                                    QUALIFIED         NON-QUALIFIED
                               STATE                                  PLANS               PLANS
                               -----                                ---------         -------------
    <S>                                                             <C>               <C>
    California..................................................       .50%               2.35%*
    District of Columbia........................................      2.25%               2.25%*
    Kentucky....................................................      2.00%*              2.00%*
    Maine.......................................................        --                2.00%
    Nevada......................................................        --                3.50%*
    South Dakota................................................        --                1.25%
    West Virginia...............................................      1.00%               1.00%
    Wyoming.....................................................        --                1.00%
</TABLE>
 
      * Taxes become due when annuity benefits commence, rather than when the
        premiums are collected. At the time of annuitization, the premium tax
        payable will be charged against the Certificate Value.
 
                                      B-37
<PAGE>   152
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
The expenses of issuance and distribution of the Contracts and Certificates,
other than any underwriting discounts and commissions, are as follows:
 
<TABLE>
<CAPTION>
                                                               AMOUNT*
                                                              ----------
<S>                                                           <C>
Securities and Exchange Commission Registration Fees........  $14,729.64**
Printing and Engraving......................................  $50,000
Accounting Fees and Expenses................................  $15,000
Legal Fees and Expenses.....................................  $ 2,500
                                                              ----------
                    Total Expenses..........................  $82,229.64
                                                              ==========
</TABLE>
 
---------------
   
 * Expenses are estimated and are for period ending May 1, 2000 for continuous
   offering of interests pursuant to Rule 415 but are not deducted from
   proceeds.
    
 
** $100 paid with initial registration on March 31, 1992. Registration fees of
   $25,100 were previously paid under File No. 33-33547, No. 33-43462 and No.
   33-46881, to which this Registration Statement relates pursuant to Rule 429
   under the Securities Act of 1933.
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
Article VI, Section 1. of the Bylaws of Kemper Investors Life Insurance Company
provides for indemnification of Directors and Officers as follows:
 
          SECTION 1. The company shall indemnify any person against all expenses
     (including attorneys fees), judgments, fines, amounts paid in settlement
     and other costs actually and reasonably incurred by him in connection with
     any threatened, pending or completed action, suit or proceeding, whether
     civil, criminal, administrative or investigative (other than an action by
     or in the right of the company) in which he is a party or is threatened to
     be made party by reason of his being or having been a director, officer,
     employee or agent of the company, or serving or having served, at the
     request of the company, as a director, officer, employee or agent of
     another corporation, partnership, joint venture, trust or other enterprise,
     or by reason of his holding a fiduciary position in connection with the
     management or administration of retirement, pension, profit sharing or
     other benefit plans including, but not limited to, any fiduciary liability
     under the Employee Retirement Income Security Act of 1974 and any amendment
     thereof, if he acted in good faith and in a manner he reasonably believed
     to be in and not opposed to the best interests of the company, and with
     respect to any criminal action or proceeding, had no reasonable cause to
     believe his conduct was unlawful. The termination of any action, suit or
     proceeding by judgment, order, settlement, conviction, or upon a plea of
     NOLO CONTENDERE or its equivalent, shall not, of itself, create a
     presumption that he did not act in good faith and in a manner which he
     reasonably believed to be in or not opposed to the best interests of the
     corporation, and, with respect to any criminal action or proceeding, had
     reasonable cause to believe that his conduct was unlawful.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
 
   
Within the past three years, Registrant has sold, in reliance on Rule 506 of
Regulation D under the Securities Act of 1933, as amended, unregistered Private
Placement Group and Individual Variable Life Insurance Policies ("Policies") to
banks and other corporations as a financing or cost recovery vehicle for pre-
and post-retirement employee benefits. There was no predetermined aggregate
offering price as purchase amounts are premium payments under life insurance
policies which are based on the lives insured and insurance underwriting.
Certain offerings of the Policies were made directly by the Registrant and not
through a principal underwriter. When offered directly by the Registrant, no
commissions were paid for the sale of the Policies. Certain offerings of the
Policies were made through Zurich Capital Markets Securities Inc. or Life
Insurance Solutions, LLC, doing its securities business as LIS Securities,
affiliates of Registrant, as principal underwriter for the Policies. In these
instances, compensation of up to 3% of premium may be paid to registered
broker-dealers for distribution-related activities involving the Policies.
    
 
                                      II-1
<PAGE>   153
 
   
Registrant has also sold unregistered Private Placement Individual Variable Life
Insurance Policies and Group Flexible Premium Variable Deferred Annuity
Contracts (collectively "HNW Policies") to certain high net worth "qualified
purchasers", as that term is defined under Section 3(c)(7) of the Securities Act
of 1933. There was no predetermined aggregate offering price as purchase amounts
are premium payments under life insurance policies which are based on the lives
insured and insurance underwriting or purchase payments under annuity contracts.
Life Insurance Solutions, LLC, or Investors Brokerage Services, Inc., affiliates
of Registrant, serves as principal underwriter of these offerings. Compensation
up to 3% of premium may be paid to registered broker-dealers for
distribution-related activities involving the HNW Policies.
    
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
(A) EXHIBITS
 
   
<TABLE>
<CAPTION>
  EXHIBIT NO.                              DESCRIPTION
  -----------                              -----------
<C>         <S>    <C>
       (1)1 (a)    Distribution Agreement
       (2)1 (b)    Specimen Selling Group Agreement of Investors Brokerage
                   Services, Inc.
       (2)1 (c)    General Agent Agreement
       (2)4 (a)    Form of Group Variable and Market Value Adjusted Annuity
                   Contract
       (2)4 (b)    Form of Certificate to Variable and Market Value Adjusted
                     Annuity Contract and Enrollment Application
       (2)4 (c)    Form of Individual Variable and Market Value Adjusted
                     Annuity Contract and Enrollment Application
       (2)4 (d)    Form of Endorsement to Variable and Market Value Adjusted
                     Deferred Annuity Contract
       (2)4 (e)    Form of Endorsement to Certificate to Variable and Market
                     Value Adjusted Deferred Annuity Contract
       (1)5        Opinion and Consent of Counsel regarding legality
         23 (a)    Consents of PricewaterhouseCoopers LLP, Independent
                   Accountants
         23 (b)    Consent of KPMG LLP, Independent Auditors
      (1)23 (c)    Consent of Counsel (See Exhibit 5)
      (2)24        Power of Attorney Forms
         99 (a)    Schedule IV: Reinsurance (year ended December 31, 1998)
      (3)99 (b)    Schedule IV: Reinsurance (year ended December 31, 1997)
      (4)99 (c)    Schedule IV: Reinsurance (year ended December 31, 1996)
         99 (d)    Schedule V: Valuation and qualifying accounts (year ended
                   December 31, 1998)
      (3)99 (e)    Schedule V: Valuation and qualifying accounts (year ended
                   December 31, 1997)
      (4)99 (f)    Schedule V: Valuation and qualifying accounts (year ended
                   December 31, 1996)
      (1)99 (g)    Notice Concerning Regulatory Relief
</TABLE>
    
 
---------------
 
(1) Incorporated herein by reference to the Registration Statement on Form S-1
    (File No. 333-02491) filed on or about April 12, 1996.
 
(2) Incorporated herein by reference to Amendment No. 2 to the Registration
    Statement on Form S-1 (File No. 333-02491) filed on or about April 23, 1997.
 
   
(3) Incorporated herein by reference to Post-Effective Amendment No. 11 to the
    Registration Statement on Form N-4 for KILICO Variable Annuity Separate
    Account (File No. 33-43501) filed on or about April 16, 1998.
    
 
   
(4) Incorporated herein by reference to Form 10-K for Kemper Investors Life
    Insurance Company for fiscal year ended 12/31/96 filed on or about March 25,
    1997.
    
 
(B) FINANCIAL STATEMENTS
 
     Reports of Independent Auditors
 
                                      II-2
<PAGE>   154
 
   
     KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31,
      1998 and 1997
    
 
   
     KILICO and Subsidiaries Consolidated Statements of Operations, years ended
      December 31, 1998, 1997 and 1996
    
 
   
     KILICO and Subsidiaries Consolidated Statements of Comprehensive Income,
      years ended December 31, 1998, 1997 and 1996
    
 
   
     KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity,
      years ended December 31, 1998, 1997 and 1996
    
 
   
     KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended
      December 31, 1998, 1997 and 1996
    
 
     Notes to Consolidated Financial Statements
 
   
ITEM 17. UNDERTAKINGS.
    
 
(a) The undersigned registrant hereby undertakes:
 
     (1) To file, during any period in which offers or sales are being made, a
         post-effective amendment to this registration statement:
 
         (i) To include any prospectus required by section 10(a)(3) of the
             Securities Act of 1933;
 
         (ii) To reflect in the Prospectus any facts or events arising after the
              effective date of the registration statement (or the most recent
              post-effective amendment thereof) which, individually or in the
              aggregate, represent a fundamental change in the information set
              forth in the registration statement;
 
        (iii) To include any material information with respect to the plan of
              distribution not previously disclosed in the registration
              statement or any material change to such information in the
              registration statement.
 
     (2) That, for the determining of any liability under the Securities Act of
         1933, each such post-effective amendment shall be deemed to be a new
         registration statement relating to the securities offered therein, and
         the offering of such securities at that time shall be deemed to be the
         initial bona fide offering thereof.
 
     (3) To remove from registration by means of a post-effective amendment any
         of the securities being registered which remain unsold at the
         termination of the offering.
 
(b) The undersigned registrant hereby undertakes that, for purposes of
    determining any liabilities under the Securities Act of 1933, each filing of
    the registrant's annual report pursuant to section 13(a) or section 15(d) of
    the Securities Exchange Act of 1934 (and, where applicable, each filing of
    an employee benefit plan's annual report pursuant to section 15(d) of the
    Securities Exchange Act of 1934) that is incorporated by reference in the
    registration statement shall be deemed to be a new registration statement
    relating to the securities offered therein, and the offering of such
    securities at that time shall be deemed to be the initial bona fide offering
    thereof.
 
(c) Insofar as indemnification for liabilities arising under the Securities Act
    of 1933 may be permitted to directors, officer and controlling persons of
    the registrant pursuant to the foregoing provisions, or otherwise, the
    registrant has been advised that in the opinion of the Securities and
    Exchange Commission such indemnification is against public policy as
    expressed in the Act and is, therefore, unenforceable. In the event that a
    claim for indemnification against such liabilities (other than the payment
    by the registrant of expenses incurred or paid by a director, officer or
    controlling person of the registrant in the successful defense of any
    action, suit or proceeding) is asserted by such director, officer or
    controlling person in connection with the securities being registered, the
    registrant will, unless in the opinion of its counsel the matter has been
    settled by controlling precedent, submit to a court of appropriate
    jurisdiction the question whether such indemnification by it is against
    public policy as expressed in the Act and will be governed by the final
    adjudication of such issue.
 
                                      II-3
<PAGE>   155
 
                                   SIGNATURES
 
   
As required by the Securities Act of 1933, the Registrant has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Long Grove and State of
Illinois on the 16th day of April, 1999.
    
 
                                       KEMPER INVESTORS LIFE INSURANCE COMPANY
                                       (Registrant)
 
                                       BY:        /s/ JOHN B. SCOTT
 
                                         ---------------------------------------
                                         John B. Scott, Chief Executive Officer
                                           and President
 
   
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following directors and principal
officers of Kemper Investors Life Insurance Company in the capacities indicated
on the 16th day of April, 1999.
    
 
   
<TABLE>
<CAPTION>
                   SIGNATURE                                            TITLE
                   ---------                                            -----
<C>                                                <S>
 
               /s/ JOHN B. SCOTT                   Chief Executive Officer, President and Director
-----------------------------------------------    (Principal Executive Officer)
                 John B. Scott
 
               /s/ W.H. BOLINDER                   Chairman of the Board and Director
-----------------------------------------------
              William H. Bolinder
 
           /s/ FREDERICK L. BLACKMON               Senior Vice President and Chief Financial
-----------------------------------------------    Officer (Principal Financial Officer and
             Frederick L. Blackmon                 Principal Accounting Officer)
 
              /s/ LOREN J. ALTER                   Director
-----------------------------------------------
                Loren J. Alter
 
              /s/ DAVID A. BOWERS                  Director
-----------------------------------------------
                David A. Bowers
 
              /s/ ELIANE C. FRYE                   Director
-----------------------------------------------
                Eliane C. Frye
 
               /s/ GUNTHER GOSE                    Director
-----------------------------------------------
                 Gunther Gose
 
             /s/ JAMES E. HOHMANN                  Director
-----------------------------------------------
               James E. Hohmann
</TABLE>
    
 
                                      II-4
<PAGE>   156
 
                                  EXHIBIT LIST
 
   
<TABLE>
<CAPTION>
                                                                           SEQUENTIALLY
EXHIBIT                                                                      NUMBERED
NUMBER                             DESCRIPTION                                PAGES
-------                            -----------                             ------------
<C>        <S>                                                             <C>
 23(a)     Consents of PricewaterhouseCoopers LLP Independent
           Accountants
 23(b)     Consent of KPMG LLP, Independent Auditors
 99(a)     Schedule IV: Reinsurance (year ended December 31, 1998)
 99(d)     Schedule V: Valuation and qualifying accounts (year ended
           December 31, 1998)
</TABLE>