Except as otherwise noted, amounts are stated in thousands, except share data.

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide in narrative form the perspective of the management of Kansas City Life Insurance Company (the Company) on its financial condition, results of operations, liquidity and certain other factors that may affect its future results. The following is a discussion and analysis of the results of operations for the third quarter and nine months ended September 30, 2008 and 2007 and the financial condition of the Company as of September 30, 2008. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in this document, as well as the Company's Annual Report on Form 10-K for the year ended December 31, 2007.

Overview

Kansas City Life Insurance Company is a financial services company that is predominantly focused on sales and administration of life and annuity insurance products. The Company primarily consists of three life insurance companies. Kansas City Life Insurance Company (Kansas City Life) is the parent company. Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American) are wholly-owned subsidiaries.

Kansas City Life markets individual insurance products, including traditional, interest sensitive and variable products through a nationwide sales force of independent general agents and third-party marketing arrangements. Kansas City Life also markets group insurance products, which include life, dental and disability products through a nationwide sales force of independent general agents, group brokers and third-party marketing arrangements. Kansas City Life operates in 48 states and the District of Columbia.

Sunset Life is a life insurance company that maintains its current block of business, but does not produce new sales. Sunset Life is included in the Individual Insurance segment and its individual insurance products include traditional and interest sensitive products. Sunset Life operates in 43 states and the District of Columbia.

Old American sells final expense insurance products nationwide through a general agency system, with exclusive territories, using direct response marketing to supply agents with leads. Old American's administrative and accounting operations are part of the Company's home office but it operates and maintains a separate and independent field force. Old American operates in 46 states and the District of Columbia.

The Company operates in the life insurance sector of the financial services industry in the United States. This industry is highly competitive with respect to pricing, selection of products and quality of service. No single competitor or any small group of competitors dominates any of the markets in which the Company operates. General economic conditions may affect future results. Interim results are not necessarily indicative of results for the entire year and should be read in conjunction with the Company's 2007 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

The Company earns revenues primarily from premiums received from the sale of life, annuity and accident and health policies, from earnings on its investment portfolio and from the sale of investment assets. For financial statement purposes, revenues from the sale of traditional life insurance and annuity products and supplemental contracts with life contingencies are reported as premium income. Considerations for supplemental contracts with life contingencies are reported as part of other revenues. However, deposits received from the sale of interest sensitive products, namely universal life insurance products, deferred annuities, and annuities and supplemental contracts without life contingencies are not reported as premium revenues, but are instead reported as additions to the policyholders' account balances and are reflected as deposits in the Statements of Cash Flows. Accordingly, revenues on these products are recognized over time in the form of contract charges assessed against policyholder account balances, charges assessed on the early surrender of policyholder account balances and other charges deducted from policyholders' balances.

The Company's profitability depends on many factors, which include but are not limited to:

• The sales of life, annuity, and accident and health products;

• The rate of morbidity, disability and incurrence of other policyholder benefits;

• The rate of mortality, lapse and surrenders of future policy benefits and policyholder account balances;

• Persistency of existing insurance policies;

• Interest rates credited to policyholders;

• The effectiveness of reinsurance programs;

• The amount of investment assets under management;

• Investment spreads earned on policyholder account balances;

• The ability to maximize investment returns and minimize risks such as interest rate risk, credit risk and equity risk;

• Timely and cost-effective access to liquidity;

• Management of distribution costs and operating expenses.

Strong competition presents a challenge from a new sales perspective. However, the Company's continued focus is on delivering competitive products, superior customer service, financial strength and superior sales and marketing support to customers and agents. The Company places an emphasis on expanding sales of individual life insurance products.

The Company generates cash largely through premiums and deposits collected through the sale of insurance products, through the sale of universal life-type and deposit-type products and through investment activity. The principal uses of cash are for the insurance operations, including the purchase of investments, payment of insurance benefits, operating expenses, dividends, income taxes, withdrawals from policyholder accounts and costs related to acquiring new business.

Starting in 2007 and continuing into 2008, negative market conditions have significantly impacted the financial markets and accordingly, the Company's investments and revenues. The interest rate and credit environment continues to present a significant challenge to the markets as a whole and specifically to companies invested in fixed maturity and equity securities. These negative conditions may persist into the future as the credit and equity markets continue to be severely challenged, particularly in the financial services sector. The Company is broadly diversified and has high quality investments, as 94% of all fixed maturity securities were investment grade at September 30, 2008. However, as a result of the consolidations currently occurring in the financial servies sector, diversification in this sector will be a challenge until greater market stabilization occurs. In addition, the U.S. Government's entrance into private company arrangements and specific guarantees may add further complications to a variety of issues, yet to be fully determined.

The largest factor in the lower net income for the third quarter of 2008 compared to the third quarter of 2007 was realized investment losses. The Company had a net realized loss of $29.3 million in the third quarter of 2008 compared to a $1.3 million net realized gain in the third quarter of 2007. In the third quarter of 2008, write-downs of investments due to the recognition of other-than-temporary impairments totaled $32.5 million. There were no investments written down for other-than-temporary impairments during the third quarter of 2007. The decline in net income for the first nine months of 2008 compared to the same period in 2007 was primarily due to realized investment losses. The Company had a net realized loss of $37.6 million in the first nine months of 2008 compared to a $6.5 million gain a year ago. Write-downs of other-than-temporarily impaired investments totaled $42.7 million, for the first nine months of 2008, while no investments were written down during the first nine months of 2007.

Significant Risks

The Company is subjected to a variety of risk factors that may affect current and future results. Risk factors and cautionary factors that may affect future results were identified in Item 1A. of the Company's 2007 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. Please refer to the Company's 2007 Form 10-K at the Company's website, www.kclife.com. Risk factors that are specifically pertinent to the current-period financial statements are listed below.

The Company's invested assets, primarily including fixed income securities, are subject to customary risks of credit defaults and changes in market values.

Interest rate fluctuations could negatively affect the Company's spread income or otherwise impact its business.

Because the profitability of fixed annuity and interest-sensitive whole life, universal life and fixed portion of variable universal life insurance business depends in part on interest rate spreads, interest rate fluctuations could negatively affect profitability. Changes in interest rates may reduce both the profitability from spread businesses and the return on invested capital.

Some of the Company's products, principally fixed annuities and interest-sensitive whole life, universal life and the fixed portion of variable universal life insurance, have interest rate guarantees that expose the Company to the risk that changes in interest rates will reduce the "spread," or the difference between the amounts the Company is required to credit to policyholders under contracts and the amounts earned by the Company on general account investments. Declines in spread or instances where the returns on the general account investments are not sufficient to support the interest rate guarantees on these products could have a material adverse effect on the results of operations.

The Company is entitled to reset the interest rates on fixed-rate annuities but only at limited, pre-established intervals. Because many of the Company's policies have guaranteed minimum interest or crediting rates, spreads could decrease and potentially become negative.

Increases in interest rates may cause increased surrenders and withdrawals of insurance products. These outflows may require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses.

Changes in interest rates may also impact the business in other ways. Lower interest rates may result in lower sales of certain of the Company's insurance products. Higher interest rates may create a less favorable environment for the origination of mortgage loans. Higher interest rates may also result in lower sales of variable products.

While the Company develops and maintains asset/liability management programs and procedures designed to mitigate the effect on spread income in rising or falling interest rate environments, no assurance can be given that changes in interest rates will not affect such spreads.

Equity market volatility could negatively impact the Company's business.

The amount of policy fees received from variable products is affected by the performance of the equity markets, increasing or decreasing as markets rise or fall. Equity market volatility can also affect the profitability of variable products in other ways, in particular as a result of guarantees embedded in these products.

The Company's policy claims fluctuate from period to period, resulting in earnings volatility.

The Company's financial results may fluctuate from period to period due to fluctuations in policy claims incurred by the Company. However, the Company reinsures a significant amount of the mortality risk on fully underwritten and newly issued, individual life insurance contracts.

The Company could be forced to sell investments at a loss to meet policyholder withdrawals.

Many of the products offered by the Company allow policyholders and contract holders to withdraw their funds under defined circumstances. The Company manages liabilities and configures the investment portfolio so as to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities. While the Company owns a significant amount of liquid assets, a certain portion of investment assets are relatively illiquid. If the Company experiences unanticipated withdrawal or surrender activity, the Company could exhaust all other sources of liquidity and be forced to liquidate other assets, perhaps on unfavorable terms. If the Company is forced to dispose of assets on unfavorable terms, it could have an adverse effect on the Company's financial condition.

In the conduct of business, the Company makes certain assumptions regarding the mortality, persistency, expenses, interest rates, tax liability, business mix, or other factors appropriate to the type of business it expects to experience in future periods. These assumptions are also used to estimate the amounts of deferred policy acquisition costs, value of business acquired, policy reserves and accruals, future earnings, and various components of the Company's balance sheet. These assumptions are used in the operations of the Company's business in making decisions crucial to the success of the Company, including the pricing of products and expense structures relating to products. The Company's actual experience, as well as changes in estimates are used to prepare the Company's income statements. To the extent the Company's actual experience varies from period to period, deviations in our financial statements will result.

Cautionary Statement on Forward-Looking Information

This report reviews the Company's financial condition and results of operations, and historical information is presented and discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include "forward-looking statements" that fall within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements rather than historical facts and may contain words like "believe," "expect," "estimate," "project," "forecast," "anticipate," "plan," "will," "shall," and other words, phrases or expressions with similar meaning.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that could cause the Company's future results to differ materially from expected results include, but are not limited to:

• Changes in general economic conditions, including the performance of financial markets and interest rates;

• Increasing competition and changes in customer behavior, which may affect the Company's ability to sell its products and retain business;

• Customer and agent response to new products, distribution channels and marketing initiatives;

• Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing the Company's products;

• Changes in assumptions related to deferred acquisition costs and the value of business acquired;

• Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company's products or services;

• Unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations.

The Company cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Consolidated Results of Operations

Summary of Results

The Company incurred a net loss of $15.2 million in the third quarter of 2008, compared to $9.1 million in net income in the third quarter of 2007. Net loss per share was $1.30 versus net income per share of $0.77 in last year's third quarter. The net loss for the nine months was $9.9 million, compared to last year's net income of $29.2 million. Net loss per share was $0.85, compared to $2.47 net income per share one year ago.

The primary factor in the decline in the third quarter results was net realized investment losses, which totaled $29.3 million in 2008 versus a $1.3 million net investment gain in 2007. In addition, net investment income decreased $2.5 million or 5%, policyholder benefits increased $2.1 million or 5% and operating expenses increased $4.6 million or 23% versus a year ago. Partially offsetting these, total insurance revenues increased $0.9 million or 2%, other revenues increased $1.6 million or 59% and interest credited to policyholder account balances decreased $0.9 million or 4%.

Sales

The Company measures sales in terms of new premiums and deposits. Premiums are included in insurance revenues in the Consolidated Statements of Income, while deposits are shown as a Financing Activity in the Consolidated Statements of Cash Flows. The first set of tables below reconciles premiums included in insurance revenues and provides detail by new and renewal business. New premiums are also detailed by product. The second set of tables reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits by product.

The Company's marketing plan has been to focus its primary growth strategies on individual life insurance business in both the Individual Insurance and Old American segments. This growth strategy includes new premiums for individual life products and new deposits for universal life and variable universal life products. The marketing plan includes strategies to grow the business through its existing sales force and the addition of new agents and general agents. The Company believes that growth in both the number of general agents and agents is essential to this strategy. Accordingly, the Company has placed an emphasis on recruiting new general agents and agents over the past two years and providing more training and direct support within the field. In addition, the growth strategy also encourages a product mix that includes both life and annuity products.

The Company also markets a series of group products, as identified in the Group Insurance segment discussed below. These products include group life, dental and disability products. The primary growth strategies for this segment include increased productivity of the existing group representatives and continued expansion of the group distribution system. Further, growth is to be supported by the addition of new products to the portfolio, particularly voluntary-type products which tend to be more profitable.

Consolidated total premiums increased 4% in the third quarter versus the same period in the prior year as total new premiums increased 21% and total renewal premiums increased 1%. New premiums increased $1.5 million, reflecting a $0.7 million increase in both immediate annuity and group dental premiums. The increase in annuity premiums reflects changes in consumer preferences. New individual life premiums increased 9%, which includes an 11% increase in new premiums in the Old American segment. New group life premiums increased 19% and new group accident and health premiums increased 22%, the latter reflecting the increase in dental premiums.

Total premiums for the nine months increased 3% versus a year ago. Total new premiums increased 23% while total renewal premiums declined 1%. New premiums increased $5.2 million, largely due to a $3.5 million increase in immediate annuity premiums. The increase in annuity premiums reflects changes in consumer preferences. New individual life premiums increased 7%, which includes a 12% increase in new premiums in the Old American segment. The increase in new premiums at the Old American segment reflects a combination of product, compensation and distribution expansion. New group life premiums increased 45% and new group accident and health premiums increased 7%, the latter including a $1.7 million or 35% increase in new dental premiums. These improvements reflect an increase in the number of sales representatives, the realignment of sales territories, and enhanced product features within the dental product line. The Company exited the stop loss market during 2006 but continued to process existing business until the stop loss contracts expired in 2007. Excluding this product line from 2007 premiums would result in a 5% increase in total premiums, a 37% increase in total new premiums and a 57% increase in new group accident and health premiums. The increase in new group accident and health premiums was largely due to the increase in group dental premiums. The slight decline in total renewal premiums was largely the result of a 2% decline in total individual life renewal premiums.

                                           Quarter ended September 30
                                         2008      %          2007      %
New premiums:
Individual life insurance             $    3,358    9       $  3,094     5
Immediate annuities                        2,426   41          1,723    34
Group life insurance                         518   19            437    80
Group accident and health insurance        2,748   22          2,255   (20 )
Total new premiums                         9,050   21          7,509     3
Renewal premiums                          35,811    1         35,535    (1 )
Total premiums                        $   44,861    4       $ 43,044     -




                                           Nine Months ended September 30
                                          2008         %          2007      %
New premiums:
Individual life insurance             $      9,769      7       $   9,089   (2 )
Immediate annuities                          9,014     64           5,505   33
Group life insurance                         1,598     45           1,101   52
Group accident and health insurance          8,232      7           7,661   (9 )
Total new premiums                          28,613     23          23,356    3
Renewal premiums                           106,197     (1 )       107,668   (1 )
Total premiums                        $    134,810      3       $ 131,024    -

Total new deposits declined $3.1 million or 16% in the third quarter and $2.5 million or 5% in the nine months compared with the prior year. New universal life sales increased 4% in the third quarter but decreased 7% in the nine months. New variable universal life sales increased 4% in the third quarter but declined 20% in the nine months. New fixed deferred annuities decreased $2.2 million or 25% in the third quarter and $2.8 million or 13% in the nine months. New variable annuity deposits decreased $1.0 million or 15% in the third quarter but increased $1.2 million or 6% in the nine months. The declines reflect the difficult economic environment, increased competition, and the continued impact of alternative products in the marketplace. Renewal deposits increased $0.4 million or 1% in the third quarter but decreased $5.0 million or 5% in the nine months. For the third quarter, renewal universal life and fixed deferred annuity deposits increased, while variable annuity and variable universal life deposits decreased. For the nine months, renewal universal life, variable universal life and variable annuity deposits decreased while fixed deferred annuity deposits increased.

                                         Quarter ended September 30
                                       2008       %          2007     %
New deposits:
Universal life insurance            $    2,741     4       $  2,641   (9 )
Variable universal life insurance          501     4            481   (4 )
Fixed deferred annuities                 6,532   (25 )        8,727    7
Variable annuities                       5,800   (15 )        6,798   17
Total new deposits                      15,574   (16 )       18,647    7
Renewal deposits                        33,421     1         33,037    1
Total deposits                      $   48,995    (5 )     $ 51,684    3

                                         Nine Months ended September 30
                                       2008         %          2007       %
New deposits:
Universal life insurance            $     7,482     (7 )     $   8,076     5
Variable universal life insurance         1,510    (20 )         1,878     1
Fixed deferred annuities                 17,967    (13 )        20,727   (11 )
Variable annuities                       20,811      6          19,604    29
Total new deposits                       47,770     (5 )        50,285     5
Renewal deposits                         99,604     (5 )       104,629    (1 )
Total deposits                      $   147,374     (5 )     $ 154,914     1

Insurance Revenues

Insurance revenues consist of premiums from traditional insurance products, and contract charges less reinsurance ceded. In the third quarter of 2008, total insurance revenues increased 2%, reflecting a 4% increase in total premiums. This was partially offset by a 3% decrease in contract charges and a 1% increase in reinsurance ceded. Total annuity premiums increased 41%, total individual life premiums increased 2% and total accident and health premiums increased 5%. Total group life premiums increased 7%. Total individual life premiums rose 4% from the Individual Insurance segment and declined 1% from the Old American segment. For the nine months, total insurance revenues increased 2% as premiums increased 3%, reinsurance ceded declined 3% and contract charges decreased 3%. The increase in premiums resulted from a 64% increase in total annuity premiums and a 1% increase in total accident and health premiums. Total individual life premiums declined 1% compared to one year ago and total group life premiums increased 7%. Total individual life premiums increased 1% from the Individual Insurance segment and declined 2% from the Old American segment.

Contract charges consist of fees charged on universal life-type, deposit-type or investment-type products. Total contract charges declined 3% in the both the third quarter and the nine months. Policy charges declined in both the third quarter and nine months, resulting from a decline in policyholder account balances and increased sales of certain products where the contract charges are not recognized in income immediately but are deferred as unearned revenues and . . .