1
                                                                     Exhibit 5.1



                        [SHEARMAN & STERLING LETTERHEAD]









(212) 848-8015

                                  May 8, 1998




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

Ladies and Gentlemen:

                  We are acting as counsel for ARM Financial Group, Inc., a
Delaware corporation (the "Company"), in connection with the filing today by the
Company with the Securities and Exchange Commission of a Registration Statement
(the "Abbreviated Registration Statement"), which relates to the Registration
Statement on Form S-3 (No. 333-49805), as amended (the "Registration
Statement"), and the prospectus contained in the Registration Statement (the
"Prospectus"). The Abbreviated Registration Statement and the Registration
Statement cover, collectively, the registration under the Securities Act of
1933, as amended (the "Securities Act"), of 11,000,000 shares of the Company's
Class A Convertible Common Stock, par value $.01 per share (the "Class A Common
Stock"), to be issued and sold by certain stockholders of the Company (the
"Selling Stockholders"), plus up to an additional 1,388,725 shares of Class A
Common Stock to be sold by the Selling Stockholders to cover over-allotments
(collectively, the "Shares"). The Shares are to be purchased by certain
underwriters and offered for sale to the public (the "Offering") in the manner
set forth in the Prospectus.

                  In connection with the foregoing, we have examined originals,
or copies certified or otherwise identified to our satisfaction, of such
documents and corporate and public records as we have deemed necessary as a
basis for the opinions hereinafter expressed. In our examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
presented to us as originals and the conformity to the originals of all
documents presented to us as copies. In rendering our opinions, we have relied
as to factual matters upon certificates and representations of officers of the
Company and certificates of public officials.
   2
ARM                                2                               May 8, 1998

                  Based upon the foregoing and having regard for such legal
considerations as we deem relevant, we are of the opinion that:

                  (i) the Shares have been duly authorized by the Company; and

                  (ii) the Shares to be sold by the Selling Stockholders are
         validly issued, fully paid and nonassessable.

                  We are members of the Bar of the State of New York and we do
not express any opinion herein concerning any law other than the Delaware
General Corporation Law.

                  We hereby consent to the use of this opinion as Exhibit 5.1 to
the Abbreviated Registration Statement and to the use of our name under the
caption "Legal Matters" contained in the Prospectus. In giving this consent, we
do not thereby concede that we come within the category of persons whose consent
is required by the Securities Act or the General Rules and Regulations
promulgated thereunder.


                                                 Very truly yours,


                                                 /s/ Shearman & Sterling

                                                 SHEARMAN & STERLING