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 quarters ended June 30, 2012 and 2011 and the financial condition of the Company at June 30, 2012. 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 2011 Form 10-K.

Overview

Kansas City Life Insurance Company is a financial services company that is predominantly focused on the underwriting, sales, and administration of life insurance and annuity products. The consolidated entity (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. For additional information, please refer to the Overview included in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2011 Form 10-K.

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 as filed in the Company's 2011 Form 10-K. For additional information, please refer to the Overview included in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2011 Form 10-K.

Consolidated Results of Operations

Summary of Results

The Company earned net income of $8.4 million in the second quarter of 2012 compared to $11.2 million in the second quarter of 2011. Net income per share was $0.78 in the second quarter of 2012 versus $0.97 in same period in the prior year. Net income for the first six months of 2012 was $27.8 million, an increase of $11.9 million or 74% compared to last year. Net income per share for the six months was $2.50, an increase of $1.11 per share versus the same period one year earlier. The following table presents variances between the results for the second quarters and six months ended June 30, 2012 and 2011. Additional information on these items is presented below.

                                                Quarter Ended                Six Months Ended
                                                   June  30                      June  30
                                               2012 Versus 2011              2012 Versus 2011
Insurance and other revenues                  $            4,888            $            2,643
Net investment income                                     (1,458 )                      (2,640 )
Net realized investment gains                               (496 )                      14,380
Policyholder benefits and interest
credited to policyholder account
balances                                                  (2,022 )                       4,705
Amortization of deferred acquisition
costs                                                     (4,416 )                      (2,733 )
Operating expenses                                          (580 )                       1,323
Income tax expense                                         1,308                        (5,804 )

Total variance                                $           (2,776 )          $           11,874

Sales

The Company measures sales in terms of new premiums and deposits. Sales of traditional life insurance, immediate annuities, and accident and health products are reported as premium income for financial statement purposes. Deposits received from the sale of interest sensitive products, including universal life insurance, fixed deferred annuities, variable universal life, variable annuities, and supplementary contracts without life contingencies are reflected as deposits in the Consolidated Statements of Cash Flows.

The Company's marketing plan for individual products focuses on three main aspects: providing financial security with respect to life insurance, the accumulation of long-term value, and future retirement income needs. The primary emphasis is on the growth of individual life insurance business, including new premiums for individual life products and new deposits for universal life and variable universal life products.

Sales are primarily made through the Company's existing sales force. The Company emphasizes growth of the sales force with the addition of new general agents and agents. The Company believes that increased sales will result through both the number and productivity of general agents and agents. In addition, the Company places an emphasis on training and direct support to the field force to assist new agents in their start-up phase. In addition, the Company provides support to existing

agents to stay abreast of the ever-changing regulatory environment and to introduce agents to new products and enhanced features of existing products. On occasion, the Company may also selectively utilize third-party marketing arrangements to enhance its sales objectives. This allows the Company the flexibility to identify niches or pursue unique avenues in the existing market environment and to react quickly to take advantage of opportunities as they occur.

The Company also markets a series of group products. These products include group life, dental, disability, and vision products. The primary growth strategies for these products include increased productivity of the existing group representatives; planned expansion of the group distribution system; and to selectively utilize third-party marketing arrangements. Further, growth is to be supported by the addition of new products to the portfolio, particularly voluntary-type products.

The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues for the second quarters and six months ended June 30, 2012 and 2011. New premiums are also detailed by product.

                                                          Quarter Ended
                                                             June 30
                                        2012         % Change         2011         % Change
New premiums:
Individual life insurance             $   4,414              2      $   4,313              5
Immediate annuities                       3,460            234          1,037            (77 )
Group life insurance                        744             64            453             (9 )
Group accident and health insurance       3,199             (5 )        3,367              5

Total new premiums                       11,817             29          9,170            (26 )
Renewal premiums                         37,033              1         36,509              2

Total premiums                           48,850              7         45,679             (5 )
Reinsurance ceded                       (14,645 )           (2 )      (14,878 )            6

Premiums, net                         $  34,205             11      $  30,801            (10 )

                                                         Six Months Ended
                                                             June 30
                                        2012         % Change         2011         % Change
New premiums:
Individual life insurance             $   8,770              1      $   8,724              9
Immediate annuities                       5,168             38          3,746            (62 )
Group life insurance                      1,225             29            947            (16 )
Group accident and health insurance       5,743            (18 )        6,991              7

Total new premiums                       20,906              2         20,408            (20 )
Renewal premiums                         74,283              3         71,955              2

Total premiums                           95,189              3         92,363             (4 )
Reinsurance ceded                       (28,280 )            1        (27,937 )            3

Premiums, net                         $  66,909              4      $  64,426             (7 )

Consolidated total premiums increased $3.2 million or 7% in the second quarter of 2012 versus the same period in the prior year, as total new premiums increased $2.6 million or 29% and total renewal premiums increased $0.5 million or 1%. The increase in total new premiums was largely due to a $2.4 million increase in immediate annuities. Immediate annuity receipts can have sizeable fluctuations, as receipts from policyholders largely result from one-time premiums rather than recurring premiums. In addition, new group life insurance premiums increased. The increase in consolidated renewal premiums was largely due to a $0.6 million increase in individual life insurance premiums, attributable to the Old American segment.

Consolidated total premiums increased $2.8 million or 3% in the first six months of 2012 versus one year earlier, reflecting a $0.5 million or 2% increase in total new premiums and a $2.3 million or 3% increase in total renewal premiums. The increase in total new premiums was due to a $1.4 million or 38% increase in new immediate annuity premiums and a $0.3 million increase in new group life premiums. These improvements were partially offset by a $1.2 million or 18% decrease in new group accident and health premiums, primarily in the dental and short-term disability lines. The increase in renewal premiums reflected an increase in individual life insurance premiums from both the Individual and Old American segments. In addition, renewal group accident and health premiums increased, largely from the short-term disability line.

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, 2012 and 2011. New deposits are also detailed by product.

                                                                  Quarter Ended
                                                                     June 30
                                           2012            % Change              2011             % Change
New deposits:
Universal life insurance              $        2,857             (24 )      $        3,750               22
Variable universal life insurance                103             (62 )                 268               35
Fixed deferred annuities                      12,469             (31 )              18,025               58
Variable annuities                             4,642             (24 )               6,142               10

Total new deposits                            20,071             (29 )              28,185               39
Renewal deposits                              35,325              (3 )              36,333                -

Total deposits                        $       55,396             (14 )      $       64,518               14

                                                                  Six Months Ended
                                                                       June 30
                                            2012             % Change               2011             % Change
New deposits:
Universal life insurance               $        6,160               (6 )       $        6,562                1
Variable universal life insurance                 260              (47 )                  493               12
Fixed deferred annuities                       31,619               (4 )               32,917               47
Variable annuities                              8,603              (14 )                9,979              (13 )

Total new deposits                             46,642               (7 )               49,951               22
Renewal deposits                               70,217               (3 )               72,031                3

Total deposits                         $      116,859               (4 )       $      121,982               10

Total new deposits decreased $8.1 million or 29% in the second quarter of 2012 compared with the second quarter of 2011. This change was primarily due to a $5.6 million or 31% decrease in new fixed deferred annuity deposits and a $1.5 million or 24% decrease in new variable annuity deposits. Total renewal deposits decreased $1.0 million or 3% in the second quarter of 2012 versus last year, reflecting a $0.9 million or 33% decrease in renewal variable annuity deposits. Total new deposits decreased $3.3 million or 7% in the first six months of 2012 compared with the prior year. This decrease was largely due to a $1.4 million or 14% decline in new variable annuity deposits and a $1.3 million or 4% decrease in new fixed deferred annuity deposits. Total renewal deposits decreased $1.8 million or 3%, reflecting a $2.1 million or 35% decrease in renewal variable annuity deposits. Partially offsetting this decline, renewal fixed deferred annuity deposits increased $0.8 million or 5% compared to last year. New sales and renewals for deposit products have been negatively affected for the second quarter and first six months of 2012 by continuing low interest rates and the uncertain economic environment.

Insurance Revenues

Insurance revenues consist of premiums, net of reinsurance, and contract charges. In the second quarter of 2012, total insurance revenues increased $5.2 million or 10%, reflecting a $3.4 million or 11% increase in net premiums and a $1.8 million or 8% increase in contract charges compared to the prior year. The increase in net premiums resulted from a $0.8 million or 3% increase in total individual life premiums, largely from the Old American segment, and a $2.4 million increase in total immediate annuity premiums.

Insurance revenues increased $3.2 million or 3% in the first six months of 2012 compared with the prior year. This increase was due to a $2.5 million or 4% increase in net premiums and a $0.7 million or 1% increase in contract charges. The increase in net premiums largely resulted from a $1.6 million or 3% increase in total individual life insurance premiums, also largely from the Old American segment, and a $1.2 million or 29% increase in total immediate annuity premiums.

Contract charges consist of cost of insurance, expense loads, amortization of unearned revenues, and surrender charges on policyholder account balances. Certain contract charges are not recognized in income immediately but are deferred and amortized into income in proportion to the expected future gross profits of the business, in a manner similar to DAC. Profit expectations are based upon assumptions of future interest spreads, mortality margins, expense margins, and policy and premium persistency experience. At least annually, a review is performed of the assumptions related to profit expectations. If it is determined the assumptions should be revised, the impact is recorded as a change in the revenue reported in the current period as an unlocking adjustment.

Contract charges are impacted by the sales of new products and the persistency of both existing and closed blocks of business. The closed blocks of business reflect policies and companies that the Company has purchased but to which the Company is not actively pursuing marketing efforts to generate new sales and has the intent of servicing to achieve long-term profit streams.

Total contract charges on all blocks of business increased $1.8 million or 8% in the second quarter of 2012 compared to the same periods in 2011. The increase in the second quarter of 2012 was largely due to a $2.5 million increase in the amortization of deferred revenue. Amortization of deferred revenue increased $1.8 million during the second quarter of 2012 due to unlocking. This unlocking was due to changes in the interest and mortality margins that resulted in a decrease to the deferred revenue liability. Conversely, deferred revenue decreased $1.8 million during second quarter 2011 due to unlocking. The 2011 unlocking was primarily the result of the implementation of a new industry mortality table and the impact of a system upgrade specific to reinsurance.

Total contract charges on all blocks of business increased $0.7 million in the first six months of 2012 compared to one year earlier. In addition to the results discussed above for the quarter, the amortization of deferred revenue increased during 2012 due to a system upgrade that occurred during 2011 that led to enhanced reinsurance modeling capabilities. Partially offsetting this increase was a $0.4 million decrease in both expense loads and cost of insurance charges. The decrease in expense loads resulted from a decline in value of variable annuities held in the separate accounts, reflecting the existing market conditions. The decline in cost of insurance charges was largely due to the runoff of closed blocks.

Total contract charges on closed blocks equaled 34% and 37% of total consolidated contract charges in the second quarters of 2012 and 2011, and 35% and 36% for the first six months of 2012 and 2011, respectively. Total contract charges on closed blocks decreased 1% in the second quarter and 2% in the first six months of 2012 compared to the same periods in the prior year. These declines reflect the runoff of the closed blocks. Total contract charges on open, or ongoing, blocks of business increased 13% in the second quarter and 4% in the first six months, reflecting in part new sales of these products and the unlocking discussed above.

The Company uses reinsurance as a means to mitigate its risks and to reduce the earnings volatility from claims. Reinsurance ceded premiums decreased $0.2 million or 2% in the second quarter of 2012 and increased $0.3 million or 1% in the first six months of 2012, as compared to the same periods in 2011. Reinsurance ceded for the Group segment increased $0.1 million or 4% in the second quarter and $0.9 million or 15% in the six months, reflecting increased disability sales that were largely reinsured. Reinsurance ceded for the Old American segment declined $0.1 million or 12% in the second quarter and $0.2 million or 15% in the first six months of 2012, reflecting the continued runoff of a large closed block of reinsured business. Reinsurance ceded for the Individual Insurance segment decreased $0.3 million or 3% in the second quarter and $0.3 million or 2% in the first six months of 2012.

Investment Revenues

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 decreased $1.0 million or 2% in the second quarter and $2.5 million or 3% in the first six months of 2012 compared with the same periods in 2011. While average invested assets increased in both the second quarter and first six months during 2012, these changes were more than offset by lower yields earned on certain investments.

Fixed maturity securities provided a majority of the Company's investment income during both the quarter and six months ended June 30, 2012. Income on these investments declined $1.1 million or 3% in the second quarter and $2.7 million or 4% in the first six months of 2012 compared to the prior year, reflecting declines in yields earned.

Investment income from mortgage loans decreased 1% in the second quarter and increased 4% in the first six months of 2012 compared to the same periods in 2011. The improvement in the six months was largely the result of higher mortgage loan portfolio holdings in the first six months of 2012 compared to the first six months of 2011, as the Company increased the mortgage loan balance through purchases made during 2011.

Net investment income is stated net of investment expenses. Investment expenses increased $0.4 million or 15% in the second quarter of 2012 and $0.2 million or 3% in the first six months of 2012 compared to the same periods in 2011. These changes were largely attributable to increased real estate expenses.

The Company realizes investment gains and losses from several sources, including write-downs of investments and sales of investment securities and real estate. Many securities purchased by the Company contain call provisions, which allow the issuer to redeem the securities at a particular price. Depending upon the terms of the call provision and price at which the security was purchased, a gain or loss may be realized.

The following table provides detail concerning realized investment gains and losses for the second quarters and six months ended June 30, 2012 and 2011.

                                                     Quarter Ended                         Six Months Ended
                                                        June 30                                June 30
                                               2012                2011                2012                2011
Gross gains resulting from:
Sales of investment securities             $           -      $        3,341      $          313      $        3,652
Investment securities called and other               595                 387                 803               1,250
Sales of real estate                               1,010                   -              16,180                   -

Total gross gains                                  1,605               3,728              17,296               4,902

Gross losses resulting from:
Sales of investment securities                       (32 )            (1,590 )               (32 )            (1,590 )
Investment securities called and other              (151 )              (125 )              (204 )              (179 )
Mortgage loans                                       (13 )                 -                (178 )                (3 )

Total gross losses                                  (196 )            (1,715 )              (414 )            (1,772 )
Change in allowance for potential future
losses on mortgage loans                             (32 )                 -                 332                   -
Amortization of DAC and VOBA                         (16 )              (120 )               (16 )              (225 )

Net realized investment gains, excluding
impairment losses                                  1,361               1,893              17,198               2,905


Net impairment losses recognized in
earnings:
Total other-than-temporary impairment
losses                                              (188 )              (238 )              (456 )              (507 )
Portion of loss recognized in other
comprehensive income                                  42                  56                 150                 114

Net impairment losses recognized in
earnings                                            (146 )              (182 )              (306 )              (393 )

Net realized investment gains              $       1,215      $        1,711      $       16,892      $        2,512

The Company recorded a net realized investment gain of $1.2 million in the second quarter of 2012, compared with a $1.7 million net realized investment gain in the second quarter of 2011. During the second quarter of 2012, investment gains on sales of real estate totaled $1.0 million. Net realized investment gains for the first six months totaled $16.9 million in 2012 compared to $2.5 million in 2011, largely reflecting gains on sales of real estate of $16.2 million. In the above table, investment securities called and other includes, but is not limited to, principal payments and sinking funds.

The Company's analysis of securities for the second quarter ended June 30, 2012 resulted in the determination that eight fixed-maturity residential mortgage-backed securities had other-than-temporary impairments and were written down by a combined $0.1 million due to credit impairments. These residential mortgage-backed securities had incremental losses, reflecting deterioration in the present value of expected future cash flows. The additional losses from these residential mortgage-backed securities totaled $0.2 million in the second quarter of 2012, including $0.1 million that was determined to be non-credit and was recognized in other comprehensive income. The total fair value of the affected securities after the write-downs was $65.7 million.

The following table summarizes securities with other-than-temporary impairments recognized in earnings by business segment during the first and second quarters of 2012 and 2011 by asset class:

                                                                                            Six Months
                                            Quarter Ended           Quarter Ended             Ended
                                              March 31                June  30               June 30
                                                2012                    2012                   2012
Bonds:
Corporate private-labeled
residential mortgage-backed
securities:
Individual Insurance                       $           143         $           134         $        277
Group Insurance                                          -                       -                    -
Old American                                            17                      12                   29

Total                                      $           160         $           146         $        306

Segment detail:
Individual Insurance                       $           143         $           134         $        277
Group Insurance                                          -                       -                    -
Old American                                            17                      12                   29
. . .