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 third quarters and nine months ended September 30, 2009 and 2008 and the financial condition of the Company as of September 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 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, immediate 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 gains and 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, wildly fluctuating market conditions have significantly impacted the financial markets and accordingly, the Company's investments and revenues. The interest rate and credit environments continue to present a significant challenge to the markets as a whole and specifically to companies invested in fixed maturity and equity securities. These 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 September 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 third quarter of 2009 compared to the third quarter of 2008 was due to several factors. First, the Company had a net realized investment loss of $1.1 million in the third quarter of 2009 compared to $29.3 million in the third quarter of 2008. In the third quarter of 2009, write-downs of investments due to the recognition of other-than-temporary impairments totaled $2.3 million, compared to $32.5 million in the third quarter of 2008. A second factor was reduced operating expenses. Partially offsetting these favorable factors, policyholder benefits increased, primarily due to an increase in benefit and contract reserves. In addition, income tax expense increased largely due to higher pretax income.

The largest factor in the increase in net income for the first nine months of 2009 compared to the same period in 2008 was a reduction in realized investment losses. The Company had a net realized loss of $7.3 million in the first nine months of 2009, compared to $37.6 million one year ago. Partially offsetting this improvement, net investment income and contract charges declined and operating expenses increased during the nine months.

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 $20.4 million or 134% in the third quarter of 2009, versus the same quarter in the prior year, to a total of $5.2 million from a loss of $15.2 million. Net income per share increased $1.75 or 135% and was $0.45 per share versus a loss of $1.30 per share in the third quarter of 2008. Net income for the nine months increased $18.6 million or 188% compared to last year, to $8.7 million from a loss of $9.9 million. Net income per share increased $1.60 or 188% and was $0.75 per share versus a loss of $0.85 per share for the first nine months of 2008.

The largest factor in the increase in the third quarter of 2009 was a decline in realized investment losses, which totaled $1.1 million versus $29.3 million in the third quarter of 2008. Operating expenses decreased $2.5 million or 10% and income tax expense increased during the third quarter, reflecting higher pretax income.

The improvement in net income for the nine months versus the same period one year ago largely resulted from a $30.3 million reduction in realized investment losses, as these losses declined from $37.6 million for the first nine months of 2008 to $7.3 million in 2009. Partially offsetting this improvement were reductions in net investment income and contract charges of $4.2 million and $1.6 million, respectively, and a $2.6 million increase in operating expenses. In addition, income tax expense increased during the nine months, reflecting higher pretax income.

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 planned 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 third quarters and nine months ended September 30, 2009 and 2008. New premiums are also detailed by product.

                                                     Quarter Ended September 30
                                           2009       % Change        2008        % Change
   New premiums:
   Individual life insurance             $  3,643             8     $  3,358              9
   Immediate annuities                     10,842           347        2,426             41
   Group life insurance                       359           (31 )        518             19
   Group accident and health insurance      2,764             1        2,748             22
   Total new premiums                      17,608            95        9,050             21
   Renewal premiums                        35,824             -       35,811              1
   Total premiums                        $ 53,432            19     $ 44,861              4

                                                  Nine Months Ended September 30
                                          2009        % Change        2008         % Change
 New premiums:
 Individual life insurance             $   10,330             6     $   9,769              7
 Immediate annuities                       16,842            87         9,014             64
 Group life insurance                       1,134           (29 )       1,598             45
 Group accident and health insurance        7,545            (8 )       8,232              7
 Total new premiums                        35,851            25        28,613             23
 Renewal premiums                         107,297             1       106,197             (1 )
 Total premiums                        $  143,148             6     $ 134,810              3

Consolidated total premiums increased 19% in the third quarter of 2009 versus the same period in the prior year, as total new premiums increased 95% and total renewal premiums were flat. New premiums increased $8.6 million, largely due to a $8.4 million increase in immediate annuities. The increase in immediate annuity sales represents a continuing demand for fixed-rate products by consumers and an increase in sales from a third-party marketing arrangement. New individual life premiums increased 8%, as new premiums in the Old American segment increased 22%. The increase in new premiums from the Old American segment reflects a combination of expanded distribution and improved agent contracts. New group life premiums decreased 31% while new group accident and health premiums increased 1%.

Total premiums for the nine months of 2009 increased 6% compared to one year ago, as total new premiums increased 25% and total renewal premiums increased 1%. New immediate annuity premiums increased $7.8 million or 87%, reflecting continued demand for fixed-rate products by consumers and an increase in sales from a third-party marketing arrangement. New individual life premiums increased 6%, reflecting a 16% increase in new individual life premiums at the Old American segment. Partially offsetting these increases, new group life insurance premiums declined 29% and new group accident and health insurance premiums declined 8%. The decrease in new group accident and health premiums was primarily due to a 21% decline in new dental premiums in the Group Insurance segment. The Company periodically adjusts its pricing on its dental product to align with its product profit expectations. Total renewal premiums increased $1.1 million, reflecting an 8% increase in group accident and health premiums. The increase in group accident and health premiums was largely due to a 9% 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 third quarters and nine months ended September 30, 2009 and 2008. New deposits are also detailed by product.

                                                   Quarter Ended September 30
                                          2009       % Change        2008       % Change
    New deposits:
    Universal life insurance            $  2,119           (23 )   $  2,741             4
    Variable universal life insurance        176           (65 )        501             4
    Fixed deferred annuities              19,323           196        6,532           (25 )
    Variable annuities                     3,330           (43 )      5,800           (15 )
    Total new deposits                    24,948            60       15,574           (16 )
    Renewal deposits                      34,196             2       33,421             1
    Total deposits                      $ 59,144            21     $ 48,995            (5 )

                                                 Nine Months Ended September 30
                                         2009        % Change        2008        % Change
   New deposits:
   Universal life insurance            $   6,079           (19 )   $   7,482            (7 )
   Variable universal life insurance         873           (42 )       1,510           (20 )
   Fixed deferred annuities               64,651           260        17,967           (13 )
   Variable annuities                     11,091           (47 )      20,811             6
   Total new deposits                     82,694            73        47,770            (5 )
   Renewal deposits                       99,308             -        99,604            (5 )
   Total deposits                      $ 182,002            23     $ 147,374            (5 )

Total new deposits increased $9.4 million or 60% in the third quarter of 2009 compared with the third quarter of 2008. This increase was driven by a $12.8 million or 196% increase in new fixed deferred annuity deposits in the third quarter of 2009. The significant sales of fixed deferred annuities can 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 23%, 65% and 43%, respectively, in the third quarter compared to one year ago. Total renewal deposits increased $0.8 million or 2% in the third quarter versus last year. This improvement resulted from higher fixed deferred annuity deposits, which increased $2.8 million or 67% compared to one year ago. This increase was partially offset by declines in the following products: $1.3 million or 6% in universal life deposits, 11% in variable universal life deposits and 10% in variable annuity deposits.

Total new deposits increased $34.9 million or 73% in the first nine months of 2009, compared to the same period one year ago. This increase was due to a $46.7 million or 260% increase in new fixed deferred annuity deposits. Partially offsetting this increase, new universal life deposits decreased $1.4 million or 19%, new variable universal life deposits declined $0.6 million or 42%, and new variable annuity deposits declined $9.7 million or 47%, compared to one year ago. Total renewal deposits were essentially flat, as a 24% increase in fixed deferred annuities was offset by a 3% decline in universal life deposits, an 8% decrease in variable universal life deposits, and a 6% decrease in variable annuities. The increase in fixed deferred annuity deposits was largely due to changes in consumer preferences, as mentioned above, as well as 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.

Insurance Revenues
Insurance revenues consist of premiums from traditional insurance products and contract charges less reinsurance ceded. In the third quarter of 2009, total insurance revenues increased $6.4 million or 11%, reflecting an $8.6 million or 19% increase in total premiums. This increase was partially offset by a 3% decline in contract charges and a 10% increase in reinsurance ceded. Total annuity premiums increased 346% and total accident and health premiums increased 6%, while total individual life premiums decreased 2% compared with last year. Total group accident and health premiums increased 7%, while total group life premiums decreased 23%. Total individual life premiums were flat in the Individual Insurance segment and increased 1% in the Old American segment.

Total insurance revenues increased $5.7 million or 3% in the first nine months of 2009, as premiums increased $8.3 million or 6% compared to one year earlier. Partially offsetting this increase, contract charges decreased $1.6 million or 2% and reinsurance ceded increased $1.0 million or 2%. Total annuity premiums increased 86% and total accident and health premiums increased 3%, while total individual life premiums declined 1% compared to last year. Total group accident and health premiums increased 4% and total group life premiums decreased 6%. The increase in accident and health premiums reflected a 9% increase in renewal dental premiums. 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 3% in the third quarter and 2% in the nine 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. Total contract charges on these closed blocks equaled 37% of total consolidated contract charges in both the third quarter and first nine months of 2009, compared to 38% in the prior year periods. Total contract charges on closed blocks declined 4% in both the third quarter and nine months. Total contract charges on open blocks of business were flat in the third quarter and declined less than 1% in the nine months compared to one year ago.

Reinsurance ceded increased $1.4 million or 10% in the third quarter and $1.0 million or 2% in the nine months versus last year. Reinsurance ceded was relatively flat for the Individual Insurance segment for both the third quarter and nine months. However, reinsurance ceded for the Group segment increased $1.3 million or 66% in the third quarter and $1.2 million or 22% in the nine months, largely due to a new third-party agreement in the long-term disability product line where business is 100% reinsured. Partially offsetting these, reinsurance ceded for the Old American segment declined $0.1 million or 9% in the third quarter and $0.3 million or 12% in the nine 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 was essentially flat in the third quarter but declined 3% in the nine months compared with the same period 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 for the nine months. While the invested asset base was also down in the third quarter, yields increased slightly compared to a year ago. Partially offsetting these changes, expenses associated with investment income declined in the nine months, 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 increased $0.3 million or 1% in the third quarter of 2009 but declined $4.8 million or 3% in the nine months, compared with the same periods in 2008. The increase in the third quarter reflected an increase in investment yields partially offset by a decline in gross investment income from reduced investment assets. The decline in the nine months 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 experienced in both periods reflects declines in book value due to sales, maturities and calls. The higher yield experienced in the third quarter primarily reflects a higher return on an alternative investment fund. The lower yield experienced in the nine months 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 $446.4 million at September 30, 2009, up $1.0 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 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 reserve was $3.4 million at September 30, 2009, unchanged from December 31, 2008. The reserve for mortgage loans is maintained at a level believed by management to be adequate to absorb estimated credit losses. Management's periodic evaluation and assessment of the adequacy of the reserve is based on known and inherent risks in the portfolio, historical and industry data, current economic conditions and other relevant factors. No mortgage loans were delinquent for more than 90 days or foreclosed upon and transferred to real estate investments during 2009 or 2008. The Company does not hold mortgage loans of any borrower that exceeds 5% of stockholders' equity. . . .