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 second quarters and six months ended June 30, 2009 and 2008 and the financial condition of the Company as of June 30, 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, vision 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 immediate annuity products and accident and health products 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 difficult 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 continue 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 93% of all fixed maturity securities were investment grade at June 30, 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 improvement in net income for the second quarter of 2009 compared to the second quarter of 2008 was due to several factors. First, the Company had a net realized loss of $1.4 million in the second quarter of 2009 compared to $8.4 million in the second quarter of 2008. In the second quarter of 2009, write-downs of investments due to the recognition of other-than-temporary impairments totaled $4.0 million, compared to $10.2 million in the second quarter of 2008. Second, policyholder benefits decreased, reflecting lower death benefits and a reduction in benefit and contract reserves. Partially offsetting these, income tax expense increased largely due to higher pretax income. In addition, operating expenses increased due to higher legal fees and pension costs. The decrease in net income for the first six months of 2009 compared to the same period in 2008 was also due to several factors. Net investment income declined and operating expenses increased during the six months. The increase in operating expenses reflected higher salaries and benefits, legal fees and pension costs. Partially offsetting these unfavorable variances, policyholder benefits decreased due to lower death benefits and a reduction in benefit and contract reserves. Also, the Company had a net realized loss on investments of $6.1 million in the first six months of 2009 compared to $8.3 million one year earlier.

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's net income increased $6.4 million or 380% in the second quarter of 2009, versus the same quarter in the prior year, to a total of $8.0 million. Net income per share increased $0.56 or 400% and was $0.70 per share versus $0.14 per share in the second quarter of 2008. Net income for the six months decreased $1.8 million or 34% compared to last year, to $3.5 million. Net income per share decreased $0.15 or 33% and was $0.30 per share.

The largest factor in the increase in the second quarter of 2009 was a $9.2 million or 20% decline in policyholder benefits. This decline was due to lower death benefits and a reduction in benefit and contract reserves. Also contributing to the increase in net income was reduced net realized investment losses, which totaled $1.4 million versus $8.4 million in the second quarter of 2008. Partially offsetting these, total premiums decreased $2.3 million or 5% as annuity premiums decreased $2.0 million or 55%. Operating expenses increased $3.3 million, reflecting higher legal fees and pension costs. Also, income tax expense increased during the second quarter, reflecting higher pretax income.

The decline in net income for the six months versus the same period one year ago largely resulted from a $4.3 million reduction in net investment income and a $5.1 million increase in operating expenses. These were partially offset by a $6.0 million decrease in policyholder benefits due to lower death benefits and a reduction in benefit and contract reserves and reduced realized investment losses. Realized investment losses were $6.1 million in the first six months of 2009 versus $8.3 million in the same period one year ago.

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 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 general agents and 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 on 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's marketing and product strategy also allows the Company the flexibility to identify niches in the existing market environments and to react quickly to be able to take advantage of short-term opportunities when they occur.

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.

The following table reconciles premiums included in insurance revenues and provides detail by new and renewal business for the second quarters and six months ended June 30, 2009 and 2008. New premiums are also detailed by product.

                                                               Quarter ended June 30
                                                        2009         %         2008        %
                New premiums:
                Individual life insurance             $  3,419         5     $  3,258        8
                Immediate annuities                      1,641       (55 )      3,613       29
                Group life insurance                       324       (43 )        566       62
                Group accident and health insurance      2,382       (17 )      2,872        6
                Total new premiums                       7,766       (25 )     10,309       16
                Renewal premiums                        35,410         1       35,153       (3 )
                Total premiums                        $ 43,176        (5 )   $ 45,462        1

                       Kansas City Life Insurance Company
        Notes to Consolidated Financial Statements (Unaudited)-Continued



                                                              Six Months ended June 30
                                                        2009         %         2008        %
                New premiums:
                Individual life insurance             $  6,687         4     $  6,411        7
                Immediate annuities                      6,000        (9 )      6,588       74
                Group life insurance                       775       (28 )      1,080       63
                Group accident and health insurance      4,781       (13 )      5,484        1
                Total new premiums                      18,243        (7 )     19,563       23
                Renewal premiums                        71,473         2       70,386       (2 )
                Total premiums                        $ 89,716         -     $ 89,949        2

Consolidated total premiums decreased 5% in the second quarter of 2009 versus the same period in the prior year, as total new premiums declined 25% and total renewal premiums increased 1%. New premiums decreased $2.5 million, largely due to a $2.0 million decrease in immediate annuities. While a consistent number of annuity policies were issued, the dollar amount of the policies was lower during the quarter compared to last year, reflecting in part tighter consumer spending. New individual life premiums increased 5%, as new premiums in the Old American segment increased 17%. The increase in new premiums from the Old American segment reflects a combination of expanded distribution and improved agent contracts and enhanced distribution expansion. New group life premiums decreased 43% and new group accident and health premiums decreased 17%, largely due to lower dental premiums. Total renewal premiums increased $0.3 million, largely due to an increase in group life premiums.

Total premiums for the six months were flat compared to one year ago. Total new premiums decreased 7% while total renewal premiums increased 2%. Total new individual life premiums increased 4%, reflecting a 13% increase in new individual life premiums at the Old American segment. Offsetting this increase, new immediate annuities decreased 9%, new group life insurance premiums declined 28% and new group accident and health insurance premiums declined 13%. The decrease in new group accident and health premiums was largely due to a 20% decline in new dental premiums at the Group Insurance segment. The Company periodically adjusts its pricing on the dental product to align with its product profit expectations. Total renewal premiums increased $1.1 million as group life premiums increased 10% and group accident and health premiums increased 7%. The increase in group accident and health premiums was largely due to an 8% increase in renewal dental premiums.

The following table reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits for the second quarters and six months ended June 30, 2009 and 2008. New deposits are also detailed by product.

                                                               Quarter ended June 30
                                                       2009         %         2008         %
                 New deposits:
                 Universal life insurance            $  2,130        (9 )   $  2,346       (13 )
                 Variable universal life insurance        293       (42 )        505        (2 )
                 Fixed deferred annuities              30,016       410        5,885         4
                 Variable annuities                     4,901       (33 )      7,302         2
                 Total new deposits                    37,340       133       16,038         -
                 Renewal deposits                      31,571        (6 )     33,679        (2 )
                 Total deposits                      $ 68,911        39     $ 49,717        (1 )

                       Kansas City Life Insurance Company
        Notes to Consolidated Financial Statements (Unaudited)-Continued



                                                             Six Months ended June 30
                                                      2009          %         2008         %
                New deposits:
                Universal life insurance            $   3,960       (16 )   $  4,741       (13 )
                Variable universal life insurance         697       (31 )      1,009       (28 )
                Fixed deferred annuities               45,328       296       11,435        (5 )
                Variable annuities                      7,761       (48 )     15,011        17
                Total new deposits                     57,746        79       32,196         2
                Renewal deposits                       65,112        (2 )     66,183        (8 )
                Total deposits                      $ 122,858        25     $ 98,379        (5 )

Total new deposits increased $21.3 million or 133% in the second quarter of 2009 compared with the second quarter of 2008. This increase was driven by a $24.1 million or 410% increase in new fixed deferred annuity deposits during the second quarter of 2009. This increase was largely due to sales of a special rate offering on deferred annuities during the second quarter of 2009. The Company highlighted marketing of this product to take advantage of an opportunity that was identified in the marketplace. The significant sales of these annuities can also be attributed to changes in consumer preferences resulting from the volatility in the equity markets. This volatility, along with the general effects of the recessionary environment, is also reflected in the reduction in sales of new universal life deposits, new variable universal life deposits and new variable annuities, which declined 9%, 42% and 33%, respectively in the second quarter compared to one year ago. However, new universal life and variable annuity deposit sales improved in the second quarter of 2009 compared with the first quarter of 2009. Total renewal deposits decreased $2.1 million or 6% in the second quarter versus last year. This reduction resulted from declines in the following products: a 3% or $0.7 million in universal life deposits, 9% in variable universal life deposits, 4% in fixed deferred annuity deposits and 33% or $1.0 million in variable annuity deposits.

Total new deposits increased $25.6 million or 79% in the first six months of 2009, compared to the same period one year ago. This increase was due to a $33.9 million increase in new fixed deferred annuity deposits, which nearly quadrupled the amount of deposits during the first six months of 2008. Partially offsetting this increase, new universal life deposits decreased $0.8 million or 16%, new variable universal life deposits declined $0.3 million or 31% and new variable annuity deposits declined $7.3 million or 48%, compared to one year ago. Total renewal deposits decreased $1.1 million or 2%, as a 5% increase in fixed deferred annuities was offset by a 2% decline in universal life deposits, a 6% decrease in variable universal life deposits and a 5% decrease in variable annuities.

Insurance Revenues
Insurance revenues consist of premiums from traditional insurance products and contract charges less reinsurance ceded. In the second quarter of 2009, total insurance revenues decreased $2.3 million or 4%, reflecting a 5% decrease in total premiums and a 1% decrease in contract charges. These declines were partially offset by a 2% decline in reinsurance ceded premiums. Total annuity premiums decreased 55%, and total accident and health premiums decreased 4%. Total individual life premiums were flat compared with last year. Total group accident and health premiums decreased 3%, while total group life premiums increased 2%. Total individual life premiums were flat from both the Individual Insurance segment and the Old American segment.

Total insurance revenues decreased $0.7 million or 1% as contract charges decreased $0.9 million or 2% for the six months. Total premiums were essentially flat and reinsurance ceded decreased $0.4 million or 2%. Total accident and health premiums increased 2% but were offset by a 9% decline in total annuity premiums. Total individual life premiums were also flat compared to last year. The increase in accident and health premiums reflected an 8% increase in renewal dental premiums. Total group life premiums increased 3%. Total individual life premiums were flat in both the Individual Insurance segment and the Old American segment.

Contract charges consist of fees charged on universal life, deposit or investment products. Total contract charges declined 1% in the second quarter and 2% in the six months. These declines can largely be attributed to two factors: lower account balances on variable contracts and the runoff of closed blocks. The Company has purchased blocks of policies and companies with the express intent of servicing these blocks to achieve purchased profit streams. The contract charges on these closed blocks declined 2% in the second quarter and 4% for the six months.

Reinsurance ceded decreased 2% in both the second quarter and six months versus last year. While reinsurance ceded was relatively flat for the Individual Insurance and Group segments, reinsurance ceded in the Old American segment declined 13% in both the second quarter and six months, 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 2% in the second quarter and 5% in the six months compared with the same periods one 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, dividends and other earnings on fixed maturity securities, equity securities, short-term investments, mortgage loans, real estate and policy loans. Gross investment income declined $1.3 million or 3% in the second quarter of 2009 and $5.1 million or 5% in the six months, compared with the same periods in 2008. These decreases 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 rates on new fixed-rate investments and rate resets of floating rate notes, reduced values on equity investments, and maturities and calls on securities with yields greater than the portfolio average.

Investments in mortgage loans totaled $442.3 million at June 30, 2009, down $3.1 million from December 31, 2008. Almost all of the mortgages were commercial loans on industrial warehouses and office properties. Mortgage loans are stated at cost, adjusted for amortization of premium and accrual of discount, less a valuation reserve for probable losses. A loan is considered impaired if it is probable that contractual amounts due will not be collected. Loans in foreclosure and loans considered to be impaired are placed on a non-accrual status. The mortgage loan valuation reserve was $3.4 million at June 30, 2009, unchanged from December 31, 2008. The valuation reserve for mortgage loans is maintained at a level believed to be adequate by management to absorb estimated credit losses. Management's periodic evaluation and assessment of the adequacy of the valuation reserve is based on known and inherent risks in the portfolio, historical and industry data, current economic conditions and other relevant factors. The Company had one loan with past-due scheduled payments of more than 60 days at June 30, 2009. However, subsequent to quarter-end, the loan was paid off in full in accordance with the terms of the note. No mortgage loans were delinquent or foreclosed upon and transferred to real estate investments during 2009 or 2008. No mortgage loans were delinquent at December 31, 2008. The Company does not hold mortgage loans of any borrower that exceeds 5% of stockholders' equity.

Investment income from mortgage loans decreased $0.2 million in the second quarter and $0.3 million in the six months compared to one year ago. These declines were due to lower rates earned on new loans, lower prepayment fees and . . .