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                                                                 EXHIBIT 10.2

                              EMPLOYMENT AGREEMENT


                  THIS EMPLOYMENT AGREEMENT, dated as of January 1, 2003,
between STANDARD MANAGEMENT CORPORATION (hereinafter the "Company"), and PAUL
B. ("PETE") PHEFFER (hereinafter "Executive").

                                    RECITALS

                  A.       Executive has made, and is expected to continue to
make, major contributions to the profitability, growth and financial strength
of the Company and its affiliates.

                  B.       The Company considers the continued services of the
Executive to be in the best interests of the Company and its shareholders and
desires to assure the services of the Executive on behalf of the Company on an
objective and impartial basis and without distraction or conflict of interest
in the event of any attempt by others to obtain control of the Company or any
of its affiliates.

                  C.       The Company desires to continue to employ Executive
as its President and Chief Financial Officer upon the terms and subject to the
conditions set forth in this Agreement.

                  D.       Executive is willing to remain employed by the
Company upon the terms and subject to the conditions set forth in this
Agreement.

                  NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants contained in this Agreement, the Company and the Executive
hereby agree as follows:

                                   AGREEMENT

                  1.       Employment. The Company hereby employs Executive,
and Executive hereby accepts employment, upon the terms and subject to the
conditions set forth in this Agreement.

                  2.       Term. The effective date of this Agreement shall be
January 1, 2003 (the "Effective Date"). Subject to the provisions for
termination set forth in Section 9 of this Agreement, the initial term of this
Agreement shall be three (3) years from and after the Effective Date; and it
shall automatically renew annually for successive three (3) year periods on
January 1 of each year thereafter, unless either party elects not to renew this
Agreement by serving written notice of such intention not to renew on the other
party at least one hundred eighty (180) days prior to the succeeding January 1.
If such an election is made, this Agreement shall be in full force and effect
for the remaining portion of the then-current three (3) year period, subject to
the provisions for termination in Section 9 of this Agreement. Any reference in
this Agreement to "the term of this Agreement" means the initial term and any
renewal term, each of which shall be considered a separate term.


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                  3.       Duties. Executive's positions with the Company shall
be President and Chief Financial Officer, and such other positions as may be
mutually agreed upon from time to time by Executive and the Board of Directors
of the Company.

                  4.       Extent of Services. Executive, subject to the
direction and control of the Board of Directors of the Company, shall have the
power and authority commensurate with his executive status and necessary to
perform his duties under this Agreement. Executive shall devote substantially
all of his employable time and attention to the business of the Company, and
shall not, without the consent of the Company, during the term of this
Agreement, be actively engaged in any other business activity, whether or not
such business activity is pursued for gain, profit or other pecuniary
advantage; but this shall not be construed as preventing Executive from
investing his assets in such form or manner as will not require any material
services on the part of Executive in the operation of the affairs of the
companies in which such investments are made.

                  5.       Compensation.

                           (a)      As compensation for services under this
                  Agreement, Executive shall receive during the first year of
                  this Agreement a base salary of Three Hundred Fifty-Six
                  Thousand Dollars ($356,000), payable in equal installments in
                  accordance with the Company's payroll procedures for its
                  salaried employees. For each succeeding year, Executive's
                  base salary shall be increased by an amount equal to
                  Executive's base salary for the previous year multiplied by
                  the percent change of the Consumer Price Index, now known as
                  the "United States Department of Labor, Bureau of Labor
                  Statistics, Consumer Price Index, U.S. City Average for all
                  Urban Consumers, Seasonally Adjusted, All Items (1982-84 =
                  100)", or, if no longer published, such similar replacement
                  index issued by the Department of Labor ("CPI"), during the
                  immediately preceding calendar year. For example, if the
                  percent change in the CPI from January 1, 2003, to December
                  31, 2003, were 5%, Executive's base salary for the second
                  year under this Agreement would be $373,800. In addition to
                  the base salary described above, Executive may receive
                  additional annual salary increases based upon his performance
                  in his executive and management capacity. The amounts of such
                  salary increases shall be determined by the Board of
                  Directors of the Company or the Compensation Committee of the
                  Board of Directors (the "Compensation Committee").

                           (b)      In addition to base salary, within ninety
                  (90) days after the end of each fiscal year of the Company,
                  Executive shall be entitled to receive a bonus equal to two
                  percent (2%) of the Company's earnings, on a consolidated
                  basis, before interest and taxes for such fiscal year of the
                  Company. Provided, however, that in no event shall
                  Executive's bonus be less than ten (10%) percent of
                  Executive's annual base salary for the then-current year. The
                  bonus shall be calculated from the books and records of the
                  Company and its affiliates, which shall be kept in accordance
                  with generally accepted accounting principles applied by the
                  Company in the preparation of its financial statements. In
                  addition to the


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                  bonus described above, Executive may receive additional
                  bonuses based upon his performance in his executive and
                  management capacity. The amounts of such bonus increases
                  shall be determined by the Board of Directors of the Company
                  or the Compensation Committee.

                           (c)      Salary and bonus payments shall be subject
                  to withholding of taxes and other amounts required to be
                  withheld by law.

                  6.       Compensation Guarantee.

                           (a)      All compensation payable to Executive under
                  Section 5 of this Agreement will be guaranteed (the
                  "Guaranteed Payments") as of the Effective Date of this
                  Agreement for the full term of this Agreement, except for any
                  termination of this Agreement provided for in Sections 9(a),
                  9(b), 9(c) or 9(e). In particular, upon termination of
                  Executive's employment for any reason other than pursuant to
                  Sections 9(a), 9(b), 9(c) or 9(e), the Company shall pay to
                  Executive a lump-sum payment, and Executive shall be entitled
                  to receive from the Company not later than ten (10) calendar
                  days after termination of Executive's employment, (i) a
                  severance distribution consisting of a cash payment equal to
                  three (3) times the sum of (A) Executive's then-current base
                  salary, as determined pursuant to Section 5(a) of this
                  Agreement for the then-current year of this Agreement in
                  which such termination occurs, and (B) an amount equal to the
                  average of his bonuses with respect to the three (3) most
                  recently completed fiscal years of the Company (including any
                  fiscal years prior to the Effective Date) and (ii) all other
                  unpaid amounts pursuant to any other provision of this
                  Agreement or otherwise; provided that, following a Control
                  Termination (as defined in Section 11(b)), the Executive
                  shall be entitled to receive the payments described in
                  Section 11 (as opposed to the Guaranteed Payments).

                           (b)      None of the Guaranteed Payments described
                  in this Section 6 shall affect the Executive's right to
                  receive the payments described in Sections 12, 13 and 14 of
                  this Agreement.

                  7.       Fringe Benefits.

                           (a)      Executive shall be entitled to participate
                  in all employee benefit plans and insurance programs offered
                  by the Company, from time to time for its executive
                  management or supervisory personnel generally, at such time
                  as Executive shall have fulfilled the eligibility
                  requirements for participation therein.

                           (b)      Executive shall be entitled to the greater
                  of (i) four (4) weeks vacation with pay, for each year during
                  the term of this Agreement and (ii) the number of paid
                  vacation and sick leave days to which he would be entitled on
                  the basis of thirty (30) years of creditable service to the
                  Company and its affiliates as of the Effective Date in
                  accordance with the Company's vacation and sick leave
                  policies.


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                           (c)      Executive may incur reasonable expenses for
                  promoting the Company's business, including expenses for
                  entertainment, travel, and similar items. The Company shall
                  reimburse Executive for all such reasonable expenses upon
                  Executive's periodic presentation of an itemized account of
                  such expenditures.

                           (d)      During the term of this Agreement, the
                  Company shall at its expense maintain a term life insurance
                  policy or policies on the life of Executive in the face
                  amount of Three Million Dollars ($3,000,000), payable to such
                  beneficiaries as Executive may designate. Following
                  termination or expiration of this Agreement for any reason,
                  for a period of sixty (60) days following the later of (i)
                  termination or expiration of this Agreement and (ii) the date
                  upon which the Company is no longer required to maintain such
                  insurance for the benefit of Executive, Executive shall have
                  the option to purchase from the Company the policy of
                  insurance (other than group insurance) on the life of
                  Executive. The purchase price of such policy shall be equal
                  to the applicable portion of any prepaid premium thereon.

                           (e)      During the term of this Agreement, the
                  Company shall at its expense maintain a disability policy or
                  policies for the benefit of Executive, with benefits at least
                  as favorable as those provided by the disability policy
                  maintained by the Company for the benefit of Executive in
                  effect as of the Effective Date.

                  8.       Disclosure of Information. As a material inducement
to the Company to enter into this Agreement and to pay to Executive the
compensation set forth in Section 5, as well as any additional benefits set
forth in this Agreement, Executive covenants and agrees that he shall not, at
any time during or following the term of this Agreement, directly or
indirectly, divulge or disclose for any purpose whatsoever, any confidential
information that has been obtained by or disclosed to him as a result of his
employment by the Company, except to the extent that such confidential
information (a) becomes a matter of public record or is published in a
newspaper, magazine or other periodical available to the general public, other
than as a result of any act or omission of Executive, (b) is required to be
disclosed by any law, regulation or order of any court or regulatory
commission, department or agency, provided that Executive gives prompt notice
of such requirement to the Company to enable the Company to seek an appropriate
protective order or (c) is necessary to perform Executive's duties under this
Agreement.

                  9.       Termination. This Agreement shall terminate on the
first to occur of the following:

                           (a)      Expiration of the term of this Agreement;

                           (b)      Termination by the Company for cause (as
                  defined below), following written notice by the Company's
                  Board of Directors to Executive specifying the particular
                  facts and circumstances constituting cause. "Cause" means:


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                                    (i)      the persistent failure of or
                           refusal by Executive, following a reasonable cure
                           period of at least thirty (30) days, to comply with
                           the terms of this Agreement or, subject to the terms
                           of this Agreement, the material orders, policies and
                           regulations of the Company, as adopted and
                           promulgated from time to time by the Company's Board
                           of Directors, and such failure or refusal proves to
                           be detrimental to the Company;

                                    (ii)     any act or acts of fraud or
                           dishonesty by Executive resulting in or tending to
                           result in gain or personal enrichment of Executive
                           at the Company's expense;

                                    (iii)    any felony conviction of
                           Executive; or

                                    (iv)     the persistent absence of
                           Executive from his employment without cause or
                           explanation;

                           (c)      Executive's death;

                           (d)      Ninety (90) days following Executive's
                  permanent and total disability, as defined in the long-term
                  disability policy provided by the Company pursuant to Section
                  7(e);

                           (e)      Termination by Executive, without cause,
                  upon ninety (90) days' prior written notice to the Company;

                           (f)      Termination by Executive, for good reason
                  (as defined in Section 12(c)).

                  10.      Effect of Termination.

                           (a)      Upon termination of this Agreement pursuant
                  to Section 9(a), 9(b), 9(c) or 9(e), Executive (or his
                  estate) shall be entitled to (i) any unpaid salary with
                  respect to periods prior to the date of termination, (ii) a
                  pro rata share of the bonus provided for in Section 5(b),
                  based upon the number of months during which he performed
                  duties under this Agreement in the year during which such
                  termination occurs (regardless of whether the Company's
                  results for such year would have resulted in a bonus being
                  paid to Executive) and (iii) any termination, disability, or
                  death benefits to which he is entitled under any of the
                  Company's employee benefit plans in effect at the time of
                  such termination.

                           (b)      In all events of termination other than
                  pursuant to Section 9(a), 9(b), 9(c) or 9(e), Executive shall
                  be entitled to receive the Guaranteed Payments described in
                  Section 6.

                           (c)      In addition to the payments Executive shall
                  be entitled to receive under Sections 6 or 11, as applicable,
                  and this Section 10, in the event of any


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                  expiration or termination of this Agreement, the Company
                  agrees to pay to Executive the benefits set forth in Sections
                  12, 13 and 14, as applicable.

                           (d)      The benefits payable to Executive under
                  this Agreement upon expiration or termination of this
                  Agreement, shall be payable to Executive regardless of any
                  determination by the Company's accountants that such payments
                  are or would be non-deductible by the Company for federal
                  income tax purposes for any reason, including but not limited
                  to Section 280G of the Internal Revenue Code of 1986, as
                  amended (the "Code").

                  11.      Change in Control; Payments for Control Termination.

                           (a)      The term "change in control" as used in
                  this Agreement shall mean a change in control of a nature
                  that would be required to be reported in response to Item
                  6(e) of Schedule 14A of Regulation 14A promulgated under the
                  Securities Exchange Act of 1934 (the "1934 Act") if such Item
                  6(e) were applicable to the Company as such Item 6(e) is in
                  effect as of the Effective Date; provided that, without
                  limitation, such a change in control shall be deemed to have
                  occurred if and when (i) any "person" (as such term is used
                  in Sections 13(d) and 14(d)(2) of the 1934 Act) is or becomes
                  a beneficial owner, directly or indirectly, of securities of
                  the Company representing fifteen percent (15%) or more of the
                  combined voting power of the Company's then-outstanding
                  securities or (ii) in connection with or as a result of a
                  tender offer, merger, consolidation, sale of assets or
                  contest for election of directors, or any combination of the
                  foregoing transactions or events, individuals who, as of the
                  date of this Agreement, constitute the Board of Directors of
                  the Company (the "Incumbent Board") cease to constitute at
                  least a majority of such Board; provided, however, that any
                  individual who becomes a director of the Company subsequent
                  to the date of this Agreement whose election was approved by
                  a vote of at least a majority of the directors then
                  comprising the Incumbent Board, shall be deemed to have been
                  a member of the Incumbent Board; and provided further, that
                  no individual who was initially elected as a director of the
                  Company as a result of an actual or threatened election
                  contest, as such terms are used in Rule 14a-11 of Regulation
                  14A promulgated under the Act, or any other actual or
                  threatened solicitation of proxies or consents by or on
                  behalf of any person other than the Board of Directors shall
                  be deemed to have been a member of the Incumbent Board or
                  (iii) any reorganization, merger or consolidation or the
                  issuance of shares of common stock of the Company in
                  connection therewith unless immediately after any such
                  reorganization, merger or consolidation (A) more than sixty
                  percent (60%) of the then-outstanding shares of common stock
                  of the corporation surviving or resulting from such
                  reorganization, merger or consolidation and more than sixty
                  percent (60%) of the combined voting power of the
                  then-outstanding securities of such corporation entitled to
                  vote generally in the election of directors are then
                  beneficially owned, directly or indirectly, by all or
                  substantially all of the individuals or entities who were the
                  beneficial owners, respectively, of the outstanding shares of
                  common stock of the Company and the outstanding voting
                  securities of the Company immediately prior


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                  to such reorganization, merger or consolidation and in
                  substantially the same proportions relative to each other as
                  their ownership, immediately prior to such reorganization,
                  merger or consolidation, of the outstanding shares of common
                  stock of the Company and the outstanding voting securities of
                  the Company, as the case may be and (B) at least a majority
                  of the members of the board of directors of the corporation
                  surviving or resulting from such reorganization, merger or
                  consolidation were members of the Board of Directors of the
                  Company at the time of the execution of the initial agreement
                  or action of the Board of Directors providing for such
                  reorganization, merger or consolidation or issuance of shares
                  of common stock of the Company or (iv) the Board of Directors
                  of the Company approves a plan of complete liquidation of the
                  Company or an agreement for the sale or disposition of all or
                  substantially all of the assets of the Company or an
                  agreement for the sale or disposition of the stock or assets
                  of a subsidiary or division of the Company representing at
                  least fifteen percent (15%) of the value of the Company on a
                  consolidated basis at the time of such approval. Upon the
                  occurrence of a change in control, the Company shall promptly
                  notify Executive in writing of the occurrence of such event
                  (such notice, the "Change in Control Notice"). If the Change
                  in Control Notice is not given within ten (10) days after the
                  occurrence of a change in control the period specified in
                  clause (b)(i) of this Section 11 shall be extended until the
                  third anniversary of the date such Change in Control Notice
                  is given.

                           (b)      The term "Control Termination" as used in
                  this Agreement shall mean (i) termination of this Agreement
                  by the Company in anticipation of or within three (3) years
                  for any reason other than pursuant to Sections 9(a), 9(b),
                  9(c), 9(d) or 9(e) following a "change in control" of the
                  Company (as defined above), or (ii) termination of this
                  Agreement by Executive for good reason (as defined in Section
                  12(c)) within three (3) years following a "change in control"
                  of the Company (as defined above).

                           (c)      In the event of a Control Termination of
                  this Agreement, the Company shall:

                                    (i)      Within ten (10) days following the
                           Control Termination, the Company shall make a
                           lump-sum payment to Executive equal to three (3)
                           times the sum of (A) Executive's then-current base
                           salary, as determined pursuant to Section 5(a) and
                           (B) the average amount of the bonuses paid to
                           Executive pursuant to Section 5(b) for the three (3)
                           preceding fiscal years.

                                    (ii)     For a period of thirty-six (36)
                           months following termination of this Agreement,
                           Executive shall continue to be entitled to all
                           benefits and service credit for benefits under
                           medical, insurance and other employee benefit plans,
                           programs and arrangements of the Company as if he
                           were still employed under this Agreement and a
                           change in control of the Company had not occurred.


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                           (d)      If, despite the provisions of paragraph (c)
                  above, benefits under any employee benefit plan shall not be
                  payable or provided under any such plan to Executive, or
                  Executive's dependents, beneficiaries and estate, because he
                  is no longer an employee of the Company, the Company itself
                  shall, to the extent necessary to provide the full value of
                  such benefits and service credits to Executive, Executive's
                  dependents, beneficiaries and estate, pay or provide for
                  payment of such benefits and service credit for such benefits
                  to Executive, his dependents, beneficiaries and estate.


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                  12.      Additional Provisions Relating to Termination.

                           (a)      The Company is aware that it is possible
                  that the Board of Directors or shareholders of the Company
                  may at some time in the future cause or attempt to cause the
                  Company (i) to fail or refuse to comply with its obligations
                  under this Agreement, (ii) to institute litigation seeking to
                  have this Agreement declared unenforceable or (iii) to take
                  action to deny Executive the benefits intended by this
                  Agreement. In any such circumstance, the parties acknowledge
                  and agree that the purposes of this Agreement would be
                  frustrated. It is the Company's intent that Executive neither
                  be required to incur any costs or expenses associated with
                  enforcement of this Agreement by litigation or other legal
                  action, nor be bound to negotiate any settlement of his
                  rights under this Agreement, because the costs and expenses
                  of any such legal action or settlement would detract from the
                  benefits intended to be provided to Executive under this
                  Agreement. Accordingly, if (x) the Company has failed or
                  refused to comply with any of its obligations under this
                  Agreement whatsoever, (y) any person institutes litigation
                  seeking to have this Agreement declared unenforceable or (z)
                  any person takes action to deny, diminish or recover any
                  benefits intended to be provided or provided to Executive by
                  this Agreement, and Executive has complied with all of his
                  material obligations under the terms of this Agreement, the
                  Company irrevocably authorizes Executive from time to time to
                  retain legal counsel of his choice, at the sole cost and
                  expense of the Company, as provided in this Section 12(a), to
                  represent Executive in connection with the initiation or
                  defense of any litigation or other legal action, whether such
                  action is by or against the Company or any director, officer,
                  shareholder or other person affiliated with the Company, in
                  any jurisdiction. The reasonable fees and expenses of such
                  legal counsel selected by Executive from time to time shall
                  be paid or reimbursed by the Company on a regular periodic
                  basis upon presentation by Executive of a statement or
                  statements prepared by such counsel, up to a maximum
                  aggregate amount of $250,000. Any costs and expenses incurred
                  by the Company by reason of any dispute between the parties
                  with respect to any dispute related to this Agreement,
                  notwithstanding the outcome of any such dispute, shall be the
                  sole responsibility of the Company, and the Company shall not
                  take any action to seek payment or reimbursement from
                  Executive (or his estate) for any such costs and expenses.

                           (b)      The amounts payable to Executive upon any
                  termination or expiration of this Agreement shall be
                  considered severance pay in consideration of past services
                  rendered on behalf of the Company and his continued service
                  from the Effective Date of this Agreement to the date he
                  becomes entitled to such payments, and the parties
                  acknowledge and agree that all such compensation constitutes
                  wage payments under the Indiana Wage Payment Statute.
                  Executive shall have no duty to mitigate his damages by
                  seeking other employment and, should Executive actually
                  receive compensation from any such other employment, the
                  payments required under this Agreement shall not be reduced
                  or offset by any such other compensation.


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                           (c)      "Good reason," as used in this Agreement,
                  shall mean the occurrence of any of the following events,
                  without Executive's prior written consent:

                                    (i)      a change in Executive's status,
                           position or the nature or scope of Executive's
                           responsibilities and authorities that, in the
                           reasonable judgment of Executive, do not represent a
                           promotion from his status, position or
                           responsibilities and authorities in existence
                           immediately prior to the termination of this
                           Agreement (with respect to Section 9(f)) or change
                           in control (with respect to Section 11(b)), as
                           applicable;

                                    (ii)     the assignment to Executive of any
                           duties or responsibilities that, in the reasonable
                           judgment of Executive, are inconsistent with his
                           status, position or responsibilities and
                           authorities;

                                    (iii)    any removal of Executive from or
                           failure to reappoint or reelect Executive to any
                           positions held by him immediately prior to the
                           termination of this Agreement (with respect to
                           Section 9(f)) or change in control (with respect to
                           Section 11(b)), as applicable;

                                    (iv)     any breach by the Company of any
                           provision of this Agreement;

                                    (v)      with respect to a change in
                           control, the reasonable determination by Executive
                           that, as a result of a change in circumstances
                           significantly affecting his position, he is unable
                           to exercise his authorities, powers, functions or
                           duties in existence immediately prior to the change
                           in control;

                                    (vi)     the Company's principal executive
                           offices are moved outside the geographic area
                           consisting of Hamilton County, Indiana, and the
                           counties contiguous to Hamilton, County, Indiana, or
                           Executive's office is located at any location other
                           than the Company's principal executive offices;

                                    (vii)    with respect to any change in
                           control, any substantial increase in required travel
                           for the Company's business in excess of Executive's
                           travel obligations prior to the change in control;

                                    (viii)   the failure by the Company to
                           continue to provide Executive with benefits
                           substantially similar to those enjoyed by him or to
                           which he was entitled under any of the Company's
                           pension, profit sharing, life insurance, medical,
                           dental, health and accident or disability plans;


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                                    (ix)     with respect to a change in
                           control, the Company's failure to obtain a
                           satisfactory agreement from any successor of the
                           Company to agree to perform all of the terms of this
                           Agreement; or

                                    (x)      any request by the Company that
                           Executive participate in an unlawful act or take any
                           action or omit to take any action constituting a
                           breach of Executive's professional standard of
                           conduct.

                           (d)      In addition to any payments, termination
                  benefits or any other benefits Executive is entitled to
                  receive under this Agreement, upon the expiration of this
                  Agreement or in the event that this Agreement is terminated
                  for any reason other than pursuant to Section 9(b), 9(c) or
                  9(e) or a Control Termination (which is addressed in Section
                  11), the Company agrees to pay the Payment Amount (as defined
                  below) to the Executive in a lump-sum payment within thirty
                  (30) days after the termination of this Agreement. The
                  "Payment Amount" means the amount, as of the date of
                  termination of Executive's employment, determined by
                  multiplying (i) the number of shares of common stock of the
                  Company then subject to unexercised options ("Unexercised
                  Options") held by the Executive that were granted by the
                  Company or an affiliate of the Company by (ii) the result of
                  subtracting the option price for such shares from the
                  Termination Market Price of such shares (as defined below).
                  For purposes of this Section 12(d), Unexercised Options shall
                  include all outstanding options whether or not they are
                  exercisable at the time of the election by Executive. Upon
                  payment by the Company of the Payment Amount in accordance
                  with this Section 12(d), the Unexercised Options shall be
                  deemed to be surrendered by the Executive and canceled by the
                  Company. Such cancellation shall be effective regardless of
                  whether the Executive surrenders an agreement relating to any
                  Unexercised Option. For purposes of this Section 12(d),
                  "Termination Market Price" for the shares means the greater
                  of (A) the highest sales price of the shares during the
                  preceding six (6) month period, (B) the book value per share
                  of the shares (diluted and as reported) and (C) the book
                  value per share of the shares (diluted and excluding
                  unrealized gain (loss) on securities).

                           (e)      Notwithstanding anything in this Agreement
                  to the contrary, Executive's (or his legal representative's)
                  right to terminate this Agreement as provided in Section
                  12(c) and (d) shall not be affected by Executive's mental or
                  physical incapacity.

                  13.      Tax Indemnity Payments.

                           (a)      Notwithstanding anything in this Agreement
                  to the contrary, in the event it shall be determined that any
                  payment or distribution by the Company to or for the benefit
                  of Executive, whether paid or payable or distributed or
                  distributable pursuant to the terms of the Agreement or
                  otherwise but determined without regard to any additional
                  payments required under this Section 13 (a "Payment"), would
                  be subject to the excise tax imposed by Section 4999 of the


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                  Code, or any successor provision (collectively, "Section
                  4999"), or any interest or penalties are incurred by
                  Executive with respect to such excise tax (such excise tax,
                  together with any such interest and penalties, are
                  hereinafter collectively referred to as the "Excise Tax"),
                  then Executive shall be entitled to receive an additional
                  payment (a "Gross-Up Payment") in an amount such that, after
                  payment by Executive of all taxes (including any interest or
                  penalties imposed with respect to such taxes), including,
                  without limitation, any Federal, state or local income and
                  employment taxes and Excise Tax (and any interest and
                  penalties imposed with respect to any such taxes) imposed
                  upon the Gross-Up Payment, Executive retains an amount of the
                  Gross-Up Payment equal to the Excise Tax imposed upon the
                  Payments.

                           (b)      Subject to the provisions of Section 13(c),
                  all determinations required to be made under this Section 13,
                  including whether and when a Gross-Up Payment is required and
                  the amount of such Gross-Up Payment and the assumptions to be
                  utilized in arriving at such determination, shall be made by
                  the Company's public accounting firm (the "Accounting Firm"),
                  which shall provide detailed supporting calculations both to
                  the Company and Executive within fifteen (15) business days
                  of the receipt of notice from Executive that there has been a
                  Payment, or such earlier time as is requested by the Company.
                  In the event that the Accounting Firm is serving as
                  accountant or auditor for the individual, entity or group
                  effecting the Change in Control, Executive shall appoint
                  another nationally recognized public accounting firm to make
                  the determinations required under this Agreement (which
                  accounting firm shall then be referred to as the Accounting
                  Firm under this Agreement). All fees and expenses of the
                  Accounting Firm shall be borne solely by the Company. Any
                  Gross-Up Payment, as determined pursuant to this Section 13,
                  shall be paid by the Company to Executive within five (5)
                  days of the receipt of the Accounting Firm's determination.
                  If the Accounting Firm determines that no Excise Tax is
                  payable by Executive, it shall furnish Executive with a
                  written opinion that failure to report the Excise Tax on
                  Executive's applicable federal income tax return would not
                  result in the imposition of a negligence or similar penalty.
                  Any determination by the Accounting Firm shall be binding
                  upon the Company and Executive. As a result of the
                  uncertainty in the application of Section 4999 at the time of
                  the initial determination by the Accounting Firm, it is
                  possible that Gross-Up Payments that will not have been made
                  by the Company should have been made by the Company
                  ("Underpayment"), consistent with the calculations required
                  to be made under this Agreement. In the event that the
                  Company exhausts its remedies pursuant to Section 13(c) and
                  Executive thereafter is required to make a payment of any
                  Excise Tax, the Accounting Firm shall determine the amount of
                  the Underpayment that has occurred and any such Underpayment
                  shall be promptly paid by the Company to or for the benefit
                  of Executive.

                           (c)      Executive shall notify the Company in
                  writing of any claim by the Internal Revenue Service that, if
                  successful, would require the payment by the Company of, or
                  result in a change in the amount of the payment by the
                  Company


                                     -12-
<PAGE>
                  of, the Gross-Up Payment. Such notification shall be given as
                  soon as practicable after Executive is informed in writing of
                  such claim and shall apprise the Company of the nature of
                  such claim and the date on which such claim is requested to
                  be paid; provided that the failure to give any notice
                  pursuant to this Section 13(c) shall not impair Executive's
                  rights under this Section 13 except to the extent the Company
                  is materially prejudiced thereby. Executive shall not pay
                  such claim prior to the expiration of the 30-day period
                  following the date on which Executive gives such notice to
                  the Company (or such shorter period ending on the date that
                  any payment of taxes with respect to such claim is due). If
                  the Company notifies Executive in writing prior to the
                  expiration of such period that it desires to contest such
                  claim, Executive shall: (i) give the Company any information
                  reasonably requested by the Company relating to such claim,
                  (ii) take such action in connection with contesting such
                  claim as the Company shall reasonably request in writing from
                  time to time, including, without limitation, accepting legal
                  representation with respect to such claim by an attorney
                  reasonably selected by the Company, (iii) cooperate with the
                  Company in good faith in order to contest such claim and (iv)
                  permit the Company to participate in any proceedings relating
                  to such claim; provided, however, that the Company shall bear
                  and pay directly all costs and expenses (including additional
                  interest and penalties) incurred in connection with such
                  contest and shall indemnify and hold Executive harmless, on
                  an after-tax basis, for any Excise Tax or income, employment
                  or other tax (including interest and penalties with respect
                  thereto) imposed as a result of such representation and
                  payment of costs and expenses.

                           (d)      If, after the receipt by Executive of an
                  amount advanced by the Company pursuant to Section 13(c),
                  Executive becomes entitled to receive, and receives, any
                  refund with respect to such claim, Executive shall (subject
                  to the Company's complying with the requirements of Section
                  13(c)) promptly pay to the Company the amount of such refund.

                  14.      Payment for Options.

                           (a)      In the event of a Control Termination of
                  this Agreement, Executive may elect, within sixty (60) days
                  after such Control Termination, to receive (in addition to
                  any other amounts owed to Executive under this Agreement) a
                  lump-sum payment in cash equal to the sum of the following:
                  (i) all or any portion of the number of shares of common
                  stock of the Company which may be acquired pursuant to
                  options granted by the Company and held by Executive at the
                  time of such election, multiplied by the Standard Management
                  Put Price; plus (ii) all or any portion of the number of
                  Successor Securities which may be acquired pursuant to
                  options (which options were granted to Executive in exchange
                  or substitution for options to acquire the common stock of
                  the Company) held by Executive at the time of such election,
                  multiplied by the Successor Security Put Price; plus (iii)
                  the number of shares of common stock of the Company which
                  were acquired pursuant to options granted by the Company
                  which were exercised, or which were discharged and satisfied
                  by the payment to


                                     -13-
<PAGE>
                  Executive of cash or other property (other than options for
                  Successor Securities), in connection with the change in
                  control subsequent to the first public announcement of the
                  transaction or event which led to the change in control,
                  multiplied by the respective per share exercise prices of
                  such exercised or discharged options. For purposes of
                  calculating the above lump-sum payment, the options described
                  in clauses (i) and (ii) shall include all such options,
                  whether or not then exercisable, and, to compensate Executive
                  for the loss of the potential future speculative value of
                  unexercised options, there shall not be any deduction of the
                  respective per share exercise prices for any of the options
                  described in such clauses (i) and (ii). The cash payment due
                  from the Company pursuant to this Section 13 shall be made to
                  Executive within ten (10) days after the date of such
                  election under this Agreement, against the execution and
                  delivery by Executive to the Company of an appropriate
                  agreement confirming the surrender to the Company of the
                  options in respect of which the lump-sum cash payment is
                  being made to Executive.

                           (b)      "Change in Control Price" means (i) in the
                  case of a change in control which occurs solely as a result
                  of a change in the composition of the Board of Directors of
                  the Company or which occurs in a transaction, or series of
                  related transactions, in which the same consideration is paid
                  or delivered to all of the holders of common stock of the
                  Company (or, in the event of an election by holders of the
                  common stock of the Company of different forms of
                  consideration, if the same election is offered to all of the
                  holders of common stock of the Company) or which occurs as a
                  result of the Board of Directors' approval of a plan of
                  complete liquidation or an agreement for the sale or
                  disposition of all or substantially all of the assets of the
                  Company or an agreement for the sale or disposition of the
                  stock or assets of a subsidiary or division of the Company
                  representing at least fifteen percent (15%) of the value of
                  the Company on a consolidated basis at the time of such
                  approval, the Price per share of the common stock of the
                  Company on the date on which the change in control occurs, or
                  if such date is not a trading day, then the trading day
                  immediately prior to such date, or (ii) in the case of a
                  change in control effected through a series of related
                  transactions, or in a single transaction in which less than
                  all of the outstanding shares of common stock of the Company
                  is acquired, the highest price paid to the holders of common
                  stock of the Company in the transaction or series of related
                  transactions whereby the change in control takes place. In
                  determining the highest price paid to the holders pursuant to
                  clause (ii) of the immediately preceding sentence, in the
                  case of Successor Securities paid or delivered to the holders
                  of common stock of the Company in exchange, payment or
                  substitution for, or upon conversion of, the common stock of
                  the Company, the price paid to such holders shall be the
                  Price of such security at the time or times paid or delivered
                  to such holders.

                           (c)      "Current Market Price" for any security
                  means the highest sales price of such security during the six
                  (6) month period prior to the termination of this Agreement.


                                     -14-
<PAGE>
                           (d)      "Exchange Ratio" means, in connection with
                  a change in control, the number of Successor Securities to be
                  paid or delivered to the holders of common stock of the
                  Company in exchange, payment or substitution for, or upon
                  conversion of, each share of such common stock.

                           (e)      "Price" for any security means the average
                  of the highest and lowest sales price of such security on a
                  trading day as shown on the Composite Tape of the New York
                  Stock Exchange (or, if such security is not listed or
                  admitted to trading on the New York Stock Exchange, on the
                  principal national securities exchange on which such security
                  is listed or admitted to trading) or, in case no sales take
                  place on such day, the average of the closing bid and asked
                  prices on the New York Stock Exchange (or, if such security
                  is not listed or admitted to trading on the New York Stock
                  Exchange, on the principal national securities exchange on
                  which such security is listed or admitted to trading) or, if
                  it is not listed or admitted to trading on any national
                  securities exchange, the average of the highest and lowest
                  sales prices of such security on such day as reported by the
                  NASDAQ Stock Market, or in case no sales take place on such
                  day, the average of the closing bid and asked prices as
                  reported by NASDAQ, or if such security is not so reported,
                  the average of the closing bid and asked prices as furnished
                  by any securities broker-dealer of recognized national
                  standing selected from time to time by the Company (or its
                  successor in interest) for that purpose.

                           (f)      "Standard Management Put Price" means the
                  greater of (i) the Change in Control Price or (ii) the
                  Current Market Price of the common stock of the Company.

                           (g)      "Successor Security Put Price" means the
                  greater of (i) the Change in Control Price divided by the
                  Exchange Ratio or (ii) the Current Market Price of the
                  Successor Securities.

                           (h)      "Successor Securities" means any securities
                  of any person received by the holders of the common stock of
                  the Company in exchange, substitution or payment for, or upon
                  conversion of, the common stock of the Company in connection
                  with a change in control.

                  15.      Covenant Against Competition. Executive acknowledges
that the services he is to render to the Company are of a special and unusual
character, with a unique value to the Company, the loss of which cannot
adequately be compensated by damages or an action at law. In view of the
confidential information to be obtained by, or disclosed by the Company to,
Executive, and as a material inducement to the Company to enter into this
Agreement, Executive covenants and agrees that during the term of this
Agreement and for two (2) years thereafter, Executive shall not, directly or
indirectly, anywhere within the State of Indiana (i) render any services, as an
agent, independent contractor, consultant or otherwise, or become employed or
compensated by, any other corporation, person or entity engaged in the business
of selling or providing life, accident or health insurance products or
services; (ii) render any services, as an


                                     -15-
<PAGE>
agent, independent contractor, consultant or otherwise, or become employed or
compensated by, any other corporation, person or entity engaged in the business
of selling or providing any lending or other financial products or services
that are competitive with the lending or other financial products or services
sold or provided by the Company or its subsidiaries, (iii) in any manner
compete with the Company or any of its subsidiaries; or (iv) solicit or attempt
to convert to other insurance carriers, finance companies or other
corporations, persons or other entities providing these same or similar
products or services provided by the Company and its subsidiaries, any
customers or policyholders of the Company, or any of its subsidiaries;
provided, however, that Executive may be a shareholder of less than five (5%)
percent of the outstanding shares of voting stock of any company listed on a
recognized stock exchange or traded in the NASD over-the-counter market. The
covenants of Executive in this Section 15 shall be void and unenforceable if
this Agreement is terminated pursuant to a Control Termination as defined in
Section 11(b). In addition, the covenants of Executive in this Section 15 shall
be void and unenforceable if the Company terminates this Agreement without
cause or Employee terminates this Agreement with good reason. Should any
particular covenant or provision of this Section 15 be held unreasonable or
contrary to public policy for any reason, including without limitation, the
time period, geographical area, or scope of activity covered by any restrictive
covenant or provision, the Company and Executive acknowledge and agree that
such covenant or provision shall automatically be deemed modified such that the
contested covenant or provision shall have the closest effect permitted by
applicable law to the original form and shall be given effect and enforced as
so modified to whatever extent would be reasonable and enforceable under
applicable law.

                  16.      Arbitration of Disputes; Injunctive Relief. Any
controversy or claim arising out of or relating to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of Indianapolis,
Indiana, in accordance with the laws of the State of Indiana by three
arbitrators, one of whom shall be appointed by the Company, one by Executive
and the third of whom shall be appointed by the first two arbitrators. If the
first two arbitrators cannot agree on the appointment of a third arbitrator,
then the third arbitrator shall be appointed by the Chief Judge of the United
States District Court for the Southern District of Indiana. The arbitration
shall be conducted in accordance with the rules of the American Arbitration
Association, except with respect to the selection of arbitrators, which shall
be as provided in this Section. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. In the
event that it shall be necessary or desirable for Executive to retain legal
counsel and/or incur other costs and expenses in connection with the
enforcement of any and all of his rights under this Agreement, the Company
shall pay (or Executive shall be entitled to recover from the Company, as the
case may be) his reasonable attorneys' fees and costs and expenses in
connection with such rights, regardless of the final outcome, unless the
arbitrators shall determine that under the circumstances recovery by Executive
of all or a part of any such fees and costs and expenses would be unjust.

                  17.      Notices. Any notice required or permitted to be
given under this Agreement shall be sufficient if in writing and if sent by
certified or registered mail, postage prepaid, return receipt requested, to the
addresses below, or to such other address as a party may from time to time
indicate in writing to the other:


                                     -16-
<PAGE>
                  If to Executive:

                           Paul B. ("Pete") Pheffer
                           464 Leeds Circle
                           Carmel, IN  46032

                  If to the Company:

                           Standard Management Corp.
                           10689 North Pennsylvania
                           Indianapolis, IN 46280-1087
                           Attention:  Chairman

Any notice of termination provided by a party to the other party must indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances alleged to provide the
basis for termination.

                  18.      Waiver of Breach and Severability. The waiver by
either party of a breach of any provision of this Agreement by the other party
shall not operate or be construed as a waiver of any subsequent breach by
either party. In the event any provision of this Agreement is found to be
invalid or unenforceable, it may be severed from the Agreement and the
remaining provisions of the Agreement shall continue to be binding and
effective.

                  19.      Entire Agreement. This instrument contains the
entire agreement of the parties. It may not be changed orally, but only by an
agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought. This Agreement
supersedes and replaces all prior employment and compensation agreements,
understandings and arrangements between Executive and the Company. This
Agreement shall have no effect upon any existing stock option agreements
between Executive and the Company.

                  20.      Binding Agreement; Governing Law; Assignment. This
Agreement shall be binding upon and shall insure to the benefit of the parties
and their successors in interest and shall be construed in accordance with and
governed by the laws of the State of Indiana. This Agreement is personal to
each of the parties to this Agreement, and neither party may assign or delegate
any of its rights or obligations under this Agreement without the prior written
consent of the other party.

                  21.      Survival. Sections 6 (Compensation Guarantee), 8
(Disclosure of Information), 10 (Effect of Termination), 11 (Change in Control;
Payments for Control Termination), 12 (Additional Provisions Relating to
Termination), 13 (Tax Indemnity Payments), 14 (Payments for Options), 15
(Covenant Against Competition), 16 (Arbitration of Disputes; Injunctive
Relief), 17 (Notices), 20 (Binding Agreement; Governing Law; Assignment).and 21
(Survival) of this Agreement shall survive any termination or expiration of
this Agreement.


                                     -17-
<PAGE>
                  22.      Joint Drafting. This Agreement has been prepared
jointly by the parties and their respective advisors and legal counsel and
shall not be strictly construed against either party.

                  23.      Advisors Consulted. Each party hereby acknowledges
and agrees that each (a) has read this Agreement in its entirety prior to
executing it, (b) understands the provisions and effects of this Agreement and
(c) has consulted with such advisors as each has deemed appropriate in
connection with its or his respective execution of the Agreement.


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                                     -18-
<PAGE>
                  IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.


"Company"                                    "Executive"

STANDARD MANAGEMENT CORPORATION


By:/s/ Martial R. Knieser, M.D.              /s/ Paul B. ("Pete") Pheffer
   --------------------------------------    ----------------------------------
   Martial R. Knieser, M.D.,                 Paul B. ("Pete") Pheffer
     Chairman, Compensation Committee


                                     -19-