Amounts are stated in thousands, except share data, or as otherwise noted.

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 first quarters ended March 31, 2009 and 2008 and the financial condition of the Company as of March 31, 2009. 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 2008 Form 10-K.

Overview

Kansas City Life Insurance Company (the 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 offers investment products and broker dealer services through its subsidiary Sunset Financial Services, Inc. (SFS) for both proprietary and non-proprietary variable insurance products, mutual funds and other securities.

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 2008 Form 10-K.

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. Revenues from the sale of traditional life insurance and annuity products and supplemental contracts with life contingencies are reported as premium income for financial statement purposes. 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 mortality, lapse and surrenders of future policy benefits and policyholder account balances;

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

• 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;

• Realized losses on investments;

• Timely and cost-effective access to liquidity;

• Management of distribution costs and operating expenses.

Strong sales competition, highly competitive products and a very challenging economic environment present significant challenges to the Company from a new sales perspective. The Company's primary emphasis is on expanding sales of individual life products. The Company's continued focus is on delivering competitive products for a reasonable cost, superior customer service, excellent financial strength and superior sales and marketing support to the field force.

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 and other withdrawals from policyholder accounts, operating expenses, premium taxes, and costs related to acquiring new business. In addition, cash is used to pay income taxes and stockholder dividends as well as to fund potential acquisition opportunities.

Starting in 2007 and continuing into 2009, 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 95% of all fixed maturity securities were investment grade at March 31, 2009. However, as a result of the consolidations currently occurring in the financial services 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 first quarter of 2009 compared to the first quarter of 2008 was realized investment losses. The Company had a net realized loss of $4.7 million in the first quarter of 2009 compared to a $0.1 million net realized gain in the first quarter of 2008. In the first quarter of 2009, write-downs of investments due to the recognition of other-than-temporary impairments totaled $6.1 million. There were no investments written down for other-than-temporary impairments during the first quarter of 2008. In addition, the Company experienced reduced net investment income, increased policyholder benefits, increased amortization of deferred acquisition costs and value of business acquired, and increased operating expenses during the first quarter of 2009 versus the same the same period one year earlier. Each of these changes negatively affected earnings in the current period relative to the first quarter of 2008.

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.

Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties. Those risks and uncertainties include, but are not limited to the risk factors listed in Item 1A. Risk Factors and Cautionary Factors that may Affect Future Results as filed in the Company's 2008 Form 10-K.

Consolidated Results of Operations

Summary of Results

The Company incurred a net loss of $4.5 million in the first quarter of 2009, compared to $3.6 million in net income in the first quarter of 2008. Net loss per share was $0.40 versus net income per share of $0.31 in last year's first quarter.

The primary factor in the decline in the first quarter of 2009 was net realized investment losses, which totaled $4.7 million versus a small realized gain in the first quarter of 2008. Also contributing to the decline was a $3.3 million or 7% decrease in net investment income, a $3.2 million or 7% increase in policyholder benefits, a $1.4 million or 12% increase in amortization of deferred acquisition costs and value of business acquired, and a $1.9 million or 8% increase in operating expenses. These were partially offset by a $2.1 million or 5% increase in premiums and a $4.4 million change in income tax expense for the two periods.

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 the Company's 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, disability, and vision 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.

The following table reconciles premiums included in insurance revenues and provides detail by new and renewal business for the first quarters ended March 31, 2009 and 2008. New premiums are also detailed by product.

                                                    Quarter ended March 31
                                                  2009      %      2008      %
          New premiums:
          Individual life insurance             $  3,268     4   $  3,153     6
          Immediate annuities                      4,359    47      2,975   200
          Group life insurance                       451   (12 )      514    64
          Group accident and health insurance      2,399    (8 )    2,612    (3 )
          Total new premiums                      10,477    13      9,254    33
          Renewal premiums                        36,063     2     35,233    (2 )
          Total premiums                        $ 46,540     5   $ 44,487     4

Consolidated total premiums increased 5% in the first quarter of 2009 versus the same period in the prior year, as total new premiums increased 13% and total renewal premiums increased 2%. New premiums increased $1.2 million, reflecting a $1.4 million increase in immediate annuities. The Company has experienced an increase in annuity premiums in recent quarters, reflecting changes in consumer product preferences. New individual life premiums increased 4%, which includes a 10% increase in new premiums in the Old American segment. The increase in new premiums from the Old American segment reflects a combination of new products and enhanced distribution expansion. Partially offsetting these, new group life premiums decreased 12% and new group accident and health premiums decreased 8%, the latter reflecting a decrease in dental premiums. Total renewal

The following table reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits for the first quarters ended March 31, 2009 and 2008. New deposits are also detailed by product.

                               Quarter ended March 31


                                                 2009      %      2008      %
           New deposits:
           Universal life insurance            $  1,830   (24 ) $  2,395   (13 )
           Variable universal life insurance        404   (20 )      504   (43 )
           Fixed deferred annuities              15,312   176      5,550   (12 )
           Variable annuities                     2,860   (63 )    7,709    37
           Total new deposits                    20,406    26     16,158     4
           Renewal deposits                      33,541     3     32,504   (13 )
           Total deposits                      $ 53,947    11   $ 48,662    (8 )

Total new deposits increased $4.2 million or 26% in the first quarter of 2009 compared with the first quarter of 2008. This increase was driven by a $9.8 million or 176% increase in new fixed deferred annuity deposits during the first quarter of 2009. This improvement can largely be attributed to changes in consumer preferences resulting from the volatility in the equity markets. This volatility is reflected in the reduction in sales of new universal life deposits, new variable universal life deposits and new variable annuities, which declined 24%, 20% and 63%, respectively in the first quarter compared to one year ago. Renewal deposits increased $1.0 million or 3% in the first quarter versus last year. This increase was due to a $0.7 million or 28% increase in variable annuity and a $0.7 million or 16% increase in fixed deferred annuity deposits. Partially offsetting these, renewal deposits declined 4% for variable universal life products and 1% for universal life products.

Insurance Revenues

Insurance revenues consist of premiums from traditional insurance products, and contract charges less reinsurance ceded. In the first quarter of 2009, total insurance revenues increased $1.6 million or 3%, reflecting a 5% increase in total premiums. This was partially offset by a 2% decrease in contract charges and a 1% decrease in reinsurance ceded. Total annuity premiums increased 47%, and total accident and health premiums increased 7%, while total individual life premiums were flat compared with last year. Total group life premiums increased 3%. Total individual life premiums declined 1% from the Individual Insurance segment and were flat in the Old American segment.

Contract charges consist of fees charged on universal life-type, deposit-type or investment-type products. Total contract charges declined 2% in the first quarter. This decline can largely be attributed to a decline in policyholder account balances, increased surrenders on variable contracts and the runoff of closed blocks.

Reinsurance ceded decreased 1% in the first quarter versus last year. While reinsurance ceded was relatively flat for the Individual Insurance and Group segments, reinsurance ceded in the Old American segment declined 12%, reflecting the runoff of a large closed block of reinsured business.

Investment Revenues

Net investment income is stated net of investment expenses. Net investment income declined 7% in the first quarter compared to a year ago. Net investment income results were negatively impacted by changes in the Company's invested asset base and yields available on the portfolio. In addition, expenses associated with investment income declined, favorably impacting results.

Gross investment income is largely composed of interest and dividends on fixed maturity securities, equity securities and short-term investments, mortgage loans, real estate and policy loans. Gross investment income declined $3.8 million or 8% in the first quarter of 2009, compared with the same period in 2008. This decrease primarily resulted from a decline in gross investment income from reduced investment assets and a decline from lower investment yields. The decline in investment assets reflects declines in book value due to sales, maturities and calls. The lower yield includes reductions due to lower rate resets of floating rate notes, maturities and calls on securities with yields greater than the portfolio average.

Investments in mortgage loans totaled $446.0 million at March 31, 2009, up slightly from December 31, 2008. Almost all of the mortgages were commercial loans on industrial warehouses and office properties. Investment

Real estate investments were $101.3 million at March 31, 2009 compared to $99.6 million at December 31, 2008. Real estate investments consist principally of office buildings and industrial warehouses that are both in use and under development, and investments in multi-family and single-family residential properties, including affordable housing. The primary monetary benefit received from investments in affordable housing is in the form of tax credits, which primarily serves to reduce current and future tax expense rather than increase investment revenues. The Company also invests in unimproved land for future development. Properties have been acquired through individual purchases, build-to-suit and speculative development. The Company generally maintains its ownership interest in these properties on a direct and joint venture basis with the long-term intention of earning positive cash flow and income by leasing the properties, along with the expectation of realizing capital appreciation upon sale. The Company periodically sells certain real estate assets when management believes that the market and timing are perceived to be advantageous. Investment income on real estate increased 8% in the first quarter of 2009. Higher rental income resulted from an increase in occupancy in certain real estate properties.

Short-term investments totaled $32.3 million at March 31, 2009, down from $35.1 million at December 31, 2008. Short-term invested assets consist primarily of money-market funds. Income on short-term investments declined $0.2 million in the first quarter of 2009. This decline was due to reduced short-term investments and a decline in yields year-over-year.

Investment income is stated net of investment expenses. Investment expenses decreased $0.5 million or 14% in the first quarter compared to last year. This decrease was primarily due to a decrease in interest expense on short-term notes payable. The Company has an investment in the Federal Home Loan Bank from which it is allowed to borrow money at favorable interest rates. The Company periodically borrows and subsequently reinvests these proceeds in higher-yielding investments. The Company had increased its borrowings during the first quarter of 2008 and subsequently reduced these borrowings. The Company had no notes payable outstanding at March 31, 2009.

The Company recorded net realized investment losses of $4.7 million in the first quarter of 2009 compared with $0.1 million in net investment gains in the first quarter of 2008. Investment losses of $6.1 million were due to write-downs of certain investment securities that were considered other-than-temporarily impaired. These were partially offset by $0.7 million in gains on the sale of real estate and $0.2 million in gains on investment securities called. The financial sector and mortgage-related securities have been hit hard by economic pressures, but the economic stress has spread to virtually all sectors and asset classes. This has resulted in large price dislocations that have affected a broad range of securities and companies. The net realized investment gain in the first quarter of 2008 primarily resulted from gains from sales and calls of investment securities being slightly higher than losses from sales of investment securities.

The Company's analysis of securities for the quarter ended March 31, 2009 resulted in the determination that six fixed-maturity issuers (seven securities) had other-than-temporary impairments and were written down by a combined $6.1 million due to credit. The aggregate impairment for these securities was $21.4 million, and $15.3 million of this amount was determined to be non-credit and was recognized in other comprehensive loss. The total fair value of the affected securities after the write-downs was $21.0 million. No other-than-temporary impairments were identified during the first quarter of 2008.

Following is a description of the securities that were written down during the first quarter of 2009:

• One security was from a mortgage and financial guaranty insurer that was written down $1.6 million. Mortgage insurers have suffered from the deterioration in the U.S. housing market and mortgage credit market. Rising mortgage delinquencies and defaults have resulted in rating downgrades for these insurers. Recent rating downgrades, combined with the issuer's need to raise additional capital to meet future payments contributed to the other-than-temporary impairment.

• One security was from a trucking company that was written down $1.6 million. As the trucking industry is highly correlated with the general economy, this company has experienced a reduction in shipping volume as a result of the recession. This company renegotiated its credit facilities in the first quarter, but new covenants placed significant requirements on the issuer. These restrictions, combined with the need to retire longer-term debt, place additional stress on cash resources and led to indications of continued weakening performance that the Company believes are other-than-temporary.

• One security was from a company that develops, manufactures and markets imaging products that was written down $1.2 million. This company's past emphasis was in traditional film, which has been largely surpassed by digital

• Two securities (from one issuer) were mortgage-backed securities that were written down by a total of $0.6 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company's cash flow projections to be less than the amortized cost of the securities and creating an other-than-temporary impairment.

• One security was a mortgage-backed security that was written down $0.1 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company's cash flow projections to be less than the amortized cost of the security and creating an other-than-temporary impairment.

• One security was written down $1.0 million as the Company accepted a tender offer on the Company's holdings from an issuer during the second quarter of 2009.

Following is information of the other-than-temporarily impaired write-downs of investment securities by sector for the first quarter of 2009: $1.5 million was from the financial sector; $0.7 million was from corporate private-labeled mortgage-backed securities; $2.7 million was from the industrial sector; $1.2 million was from the consumer, non-cyclical sector.

The following table provides detail concerning realized investment gains and losses for the first quarters ended March 31, 2009 and 2008.

                                                           Quarter ended
                                                              March 31
                                                           2009       2008
         Gross gains resulting from:
         Sales of investment securities                  $       -   $    3
         Investment securities called, put and other           243      548
         Sales of real estate                                  661       14
         Other investment gains                                  6        1
         Total gross gains                                     910      566
         Gross losses resulting from:
         Sales of investment securities                          -     (445 )
         Investment securities called, put and other             -        -
         Other investment losses                                (1 )      -
         Total gross losses                                     (1 )   (445 )
         Amortization of DAC and VOBA                          505       (1 )
         Net realized investment gains, excluding
         impairment losses                                   1,414      120

         Net impairment losses recognized in earnings:
         Total other-than-temporary impairment losses      (21,406 )      -
         Portion of loss recognized in comprehensive
         loss                                               15,288        -
         Net impairment losses recognized in earnings       (6,118 )      -
         Realized investment gains (losses)              $  (4,704 ) $  120