July 17, 1998






ARM Financial Group, Inc.
515 West Market Street
Louisville, KY 40202

Ladies and Gentlemen:

                  We have acted as counsel for ARM Financial Group, Inc., a
Delaware corporation (the "Company"), in connection with the Registration
Statement on Form S-8 (the "Registration Statement") of the Company filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to 100,000 shares (the "Shares") of
Class A Convertible Common Stock, par value $.01 per share, of the Company (the
"Common Stock"), to be issued from time to time pursuant to the Company's 1998
Non-Employee Director Stock Option Plan (the "Plan").

                  In so acting, we have examined the Registration Statement and
we have also examined and relied as to factual matters upon the representations
and warranties contained in originals, or copies certified or otherwise
identified to our satisfaction, of such documents, records, certificates and
other instruments as in our judgment are necessary or appropriate to enable us
to render the opinion expressed below. In such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents, certificates
and instruments submitted to us as originals and the conformity with originals
of all documents submitted to us as copies.

                  The opinion expressed below is limited to the law of the State
of New York, the General Corporation Law of Delaware and the federal law of the
United States, and we do not express any opinion herein concerning any other
law.

                  Based upon the foregoing and having regard for such legal
considerations as we have deemed relevant, we are of the opinion that the Shares
have been duly authorized by the





Company and, when (a) issued and delivered by the Company in accordance with the
terms of the Plan and (b) paid for in full in accordance with the terms of the
Plan, the Shares will be validly issued, fully paid and non-assessable.

                  We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement.

                                       Very truly yours,

                                       /s/ SHEARMAN & STERLING



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