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                      SENIOR SUBORDINATED CONVERTIBLE NOTE


$3,628,427                                                Dated: June 30, 1997


     FOR VALUE RECEIVED, the undersigned, STANDARD MANAGEMENT CORPORATION, an
Indiana corporation ("Maker" or the "Company"), promises to pay to the order of
Capitol American Life Insurance Company, an Arizona corporation ("Lender"), in
immediately available funds at the office of the Lender at 11825 North
Pennsylvania Street, Carmel, Indiana 46032 or at such other location as the
holder hereof may designate from time to time, the principal amount of Three
Million Six Hundred Twenty-Eight Thousand Four Hundred Twenty-Seven Dollars
($3,628,427) as set forth in a Note Agreement by and between Lender, Maker and
Transport Life Insurance Company, (the "Agreement") to which this is attached
and incorporated therein, together with interest from the date hereof (computed
on the basis of a year of 360 days of twelve 30-day months) on the outstanding
principal balance, to be fixed at a rate equal to 10% per annum in accordance
with the following terms:

     1. Principal and all unpaid interest which accrues thereon shall be
payable in full at July 1, 2004 (hereinafter the "Maturity").  Interest on the
outstanding principal balance of this Note at the rate of 10% per annum, shall
be due and payable in cash on a semi-annual basis, on January 1 and July 1
(commencing January 1, 1998).  This Note will bear interest on overdue
principal (including any overdue prepayment of principal) and on any overdue
installment of interest at 3% per annum over the per annum interest provided
for hereunder.  Maker may prepay part or all of the principal due under this
Note in accordance with Section 2 of the Agreement.

     2. This Note has been issued pursuant to, and in conjunction with the
Agreement pursuant to which Maker agreed to sell, and Lender agreed to
purchase, the Senior Subordinated Convertible Note Due July 1, 2004 evidenced
by this instrument.  The terms and provisions of the Agreement shall govern the
terms and provisions of this Note and any conflict between this Note and the
Agreement shall be resolved by the Agreement.

     3. This Note may not be offered for sale or sold, or otherwise transferred
in any transaction which would constitute a sale thereof within the meaning of
the Securities Act of 1933, as amended (the "1933 Act"), unless (i) such
security has been registered for sale under the 1933 Act and registered or
qualified upon applicable state securities laws relating to the offer and sale
of securities; or (ii) exemptions from the registration requirements of the
1933 Act and the registration or qualification requirements of all such state
securities laws are available and the Maker shall have received an opinion of
counsel satisfactory to 

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Maker that the proposed sale or other disposition of such securities may be
effected without registration under the 1933 Act and would not result in any
violation of any applicable state securities laws relating to the registration
or qualification of securities for sale, such opinion to be satisfactory to
counsel to Maker.
        
     4. The indebtedness evidenced by this Note is subordinated to the prior
payment when  due of the principal of, premium, if any, and interest on all
"Senior Indebtedness" (as defined below) of Maker.  Therefore, upon any
distribution of its assets in a liquidation or dissolution of Maker, or in
bankruptcy, reorganization, insolvency, receivership or similar proceedings
relating to Maker, Lender will not be entitled to receive payment of the
indebtedness evidenced by this Debenture until the holders of Senior
Indebtedness are paid in full.  Upon the occurrence of an "Event of Default"
with respect to any Senior Indebtedness, as such Event of Default may be
defined in such instrument evidencing the Senior Indebtedness, to the extent
such Event of Default permits the holders of such Senior Indebtedness to
accelerate the maturity thereof, then upon written notice thereof given to
Maker by any holder of such Senior Indebtedness or their representative, no
payment shall be made by Maker in respect to this Note until Maker has cured
such Event of Default to the satisfaction of the holders of such Senior
Indebtedness.  "Senior Indebtedness" means the indebtedness outstanding under
the Amended and Restated Revolving Line of Credit between the Maker and Fleet
National Bank dated as of November 8, 1996, as to be amended in connection with
the closing of the Company's acquisition of Savers Life Insurance Company.

     5. The Agreement contains a statement of the events of default under this
Note.

     6. The unpaid principal of this Note is convertible at the option of the
Lender, in whole or in part, upon surrender of this Note at the principal
office of the Company, into restricted shares of the Maker's common stock at a
conversion price ("Conversion Price") equal to $5.747 per share of the
Company's common stock.  Upon such conversion, all principal due under this
Note shall be discharged and the Company released from all obligations
thereunder, however, accrued interest shall be paid to the date of conversion.
At the option of the Lender, accrued interest may also be subject to conversion
in the same manner as principal.  The conversion price of the Note may be
subject to adjustment in the manner provided at Paragraph 7.

     The shares of the Company's common stock issuable upon the exercise of the
conversion feature shall be "restricted securities" as that term is defined
under Rule 144 of the 1933 Act and, as a consequence, may not be sold or
otherwise transferred except pursuant to registration under the 1933 Act or an
available exemption therefrom.



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     7.   The number of shares issuable to the Lender upon conversion of this
Note is subject to adjustment from time to time as follows:

     7.1  Reorganization, Merger or Sale of Assets.  If at any time while this
Note, or any portion thereof, is outstanding there shall be (i) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation with or into another corporation in which the Company is not the
surviving entity, or a reverse triangular merger in which the Company is the
surviving entity but the shares of the Company's capital stock outstanding
immediately prior to the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise, or (iii)
a sale or transfer of the Company's properties and assets as, or substantially
as, an entirety to any other person, then, as part of such reorganization,
merger, consolidation, sale or transfer, lawful provision shall be made so that
the holder of this Note shall thereafter be entitled to receive upon conversion
of the Note the number of shares of stock or other securities or  property of
the successor corporation resulting from such reorganization, merger,
consolidation, sale or transfer that a holder of the shares deliverable upon
conversion of this Note would have been entitled to receive in such
reorganization, consolidation, merger, sale or transfer if this Note had been
converted immediately before such reorganization, merger, consolidation, sale
or transfer, all subject to further adjustment as provided in this Section 7.
The foregoing provisions of this Section 7.1 shall similarly apply to
successive reorganizations, consolidations, mergers, sales and transfers and to
the stock or securities of any other corporation that are at the time
receivable upon the conversion of this Note.  If the per share consideration
payable to Lender for shares in connection with any such transaction is in a
form other than cash or marketable securities, then the value of such
consideration shall be determined in good faith by the Company's Board of
Directors.  In all events, appropriate adjustment (as determined in good faith
by the Company's Board of Directors) shall be made in the application of the
provisions of this Note with respect to the rights and interest of Lender after
the transaction, to the end that the provisions of this Note shall be
applicable after that event, as near as reasonably may be, in relation to any
shares or other property deliverable after that event upon conversion of this
Note.

     7.2  Reclassification.  If the Company, at any time while this Note, or any
portion thereof, remains outstanding, by reclassification of securities or
otherwise, shall change any of the securities as to which conversion rights
under this Note exist into the same or a different number of securities of any
other class or classes, this Note shall thereafter represent the right to
acquire such number and kind of securities as would have been issuable as the
result of such change with respect to the securities that were subject to the
conversion rights under this Note immediately prior to such reclassification or
other change and 


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the Conversion Price or number of shares received upon such conversion shall be
appropriately adjusted, all subject to further adjustment as provided in this
Section 7.
        
     7.3  Split, Subdivision or Combination of Shares.  If the Company at any
time while this Note, or any portion thereof, remains outstanding shall split,
subdivide or combine the securities as to which conversion rights under this
Note exist, into a different number of securities of the same class, the number
of shares issuable upon conversion shall be proportionately decreased in the
case of a split or subdivision or proportionately increased in the case of a
combination.

     7.4  Adjustments for Dividends in Stock or Other Securities or Property.
If while this Note or any portion hereof, remains outstanding and unexpired the
holders of the securities as to which conversion rights under this Note exist
at the time shall have received, or, on or after the record date fixed for the
determination of eligible stockholders, shall have become entitled to receive,
without payment therefor, other or additional stock or other securities or
property (other than cash) of the Company by way of dividend, then and in each
case, this Note shall represent the right to acquire upon conversion, in
addition to the number of shares of the security receivable upon conversion of
this Note, and without payment of any additional consideration therefor, the
amount of such other or additional stock or other securities or property (other
than cash) of the Company that such holder would hold on the date of such
conversion had it been the holder of record of the security receivable upon
conversion of this Note on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such conversion,
retained such shares and/or all other additional stock, other securities or
property available by this Note as aforesaid during such period, giving effect
to all adjustments called for during such period by the provisions of this
Section 7.

     7.5  Issuance of Shares Below Conversion Price.

     (a)  If while this Note, or any portion hereof, remains outstanding, the
Company shall offer and sell Additional Shares of Common Stock (as hereinafter
defined) for consideration per share less than the Conversion Price in effect
immediately prior to the issuance of such Additional Shares of Common Stock,
the Conversion Price in effect immediately prior to each such issuance shall
forthwith be adjusted upon such issuance to a price equal to the price paid per
share for such Additional Shares of Common Stock.

     (b)  For the purpose of the calculations provided in this Section 7.5, if
at any time or from time to time after the date hereof the Company shall issue
any rights or options of the purchase of, or stock or other securities
convertible into, Additional Shares of Common Stock (such Common Stock or
securities being hereinafter referred to as "Convertible Securities"), then,
and in each case, if the Effective Price (as hereinafter defined) 



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of such rights, options or Convertible Securities shall be less than the
Conversion Price, the Company shall be deemed to have issued at the time of the
issuance of such rights or options or Convertible Securities the maximum number
of Additional Shares of Common Stock issuable upon exercise or conversion
thereof and to have received as consideration for the issuance of such shares
an amount equal to the total amount of the consideration, if any, payable to
the Company upon exercise or conversion of such options or rights.  "Effective
Price" shall mean the quotient determined by dividing the total of all of such
consideration by such maximum number of Additional Shares of Common Stock.  No
further adjustment shall be made as a result of the actual issuance of
Additional Shares of Common Stock on the exercise of any such rights or options
or the conversion of any such Convertible Securities.  In the case of
Convertible Securities which have a conversion price which is based, in whole
or in part, upon a discount of the market price or value of the Company's
common stock, then for the purposes of calculating the Effective Price, the
consideration shall be deemed to include the minimum conversion price payable
to Company.
        
     If any such rights or options or the conversion privilege represented by
any such Convertible Securities shall expire prior to the Maturity hereof
without having been exercised, the adjustment to the number of shares available
hereunder upon the issuance of such rights, options or Convertible Securities
shall be readjusted to the number of shares that would have been in effect had
an adjustment been made on the basis that the only Additional Shares of Common
Stock so issued were the Additional Shares of Common Stock, if any, actually
issued or sold on the exercise of such rights or options or rights of
conversion of such Convertible Securities, and such Additional Shares of Common
Stock, if any, were issued or sold for the consideration actually received by
the Company for the granting of all such rights or options, whether or not
exercised, plus the consideration received for issuing or selling the
Convertible Securities actually converted plus the consideration, if any,
actually received by the Company on the conversion of such Convertible
Securities.

     (c) For the purpose of the calculations provided for in this Section 7.5,
if at any time or from time to time after the date hereof the Company shall
issue any rights or options for the purchase of Convertible Securities, then,
in each such case, if the Effective Price thereof is less than the then
Conversion Price, the Company shall be deemed to have issued at the time of the
issuance of such rights or options the maximum number of Additional Shares of
Common Stock issuable upon conversion of the total amount of Convertible
Securities covered by such rights or options and to have received as
consideration for the issuance of such Additional Shares of Common Stock an
amount equal to the amount of consideration, if any, received by the Company
for the issuance of such rights or options, plus the consideration, if any,
payable to the Company upon the conversion of such Convertible Securities.
"Effective Price" shall mean the quotient determined by dividing the total
amount of such consideration by such maximum number of 


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Additional Shares of Common Stock.  No further adjustment of such Conversion
Price adjusted upon the issuance of such rights or options shall be made as a
result of the actual issuance of the Convertible Securities upon the exercise
of such rights or options or upon the actual issuance of Additional Shares of
Common Stock upon the conversion of such Convertible Securities.
        
     The provisions of subsection (b) above for readjustment upon the
expiration of rights or options or the rights of conversion of Convertible
Securities, shall apply mutatis mutandis to the rights, options and Convertible
Securities referred to in this subsection (c).

     (d) The term "Additional Shares of Common Stock" as used herein shall mean
all shares of common stock issued or deemed issued by the Company after the
date hereof, other than (i) securities issued pursuant to or in connection with
the terms of the Agreement and this Note; (ii) shares of the Company's common
stock issued upon conversion of convertible securities or the exercise of
common stock purchase warrants outstanding as of the date hereof; (iii) shares
of the Company's common stock issuable to employees, officers or directors
pursuant to the Company's stock option plan; and (iv) shares of the Company's
common stock issued in connection with the acquisition of a subsidiary.

     7.6 No Impairment.  Maker will not, by any voluntary action, avoid or seek
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by Maker, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 7 and in the taking of all
such action as may be necessary or appropriate in order to protect the rights
of Lender against impairment.

     8. Lender, by acceptance hereof, acknowledges that this Note and the
shares to be issued upon conversion hereof are being acquired solely for
Lender's own account and not as nominee for any other party, and for
investment, and that Lender will not offer, sell or otherwise dispose of this
Note or any shares to be issued upon conversion hereof except under
circumstances that will not result in a violation of applicable federal and
state securities laws.  Upon exercise of this Note, Lender shall, if requested
by Maker, confirm in writing, in a form satisfactory to Maker, that the shares
so purchased are being acquired solely for Lender's own account and not as a
nominee for any other party, for investment, and not with a view toward
distribution or resale.

     All shares issued upon exercise hereof shall be stamped or imprinted with
a legend in substantially the following form (in addition to any legend
required by state securities laws):

THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.  SUCH SECURITIES AND ANY
SECURITIES OR SHARES ISSUED UPON CONVERSION THEREOF MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH 


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<PAGE>   7



REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.


     9.  Maker covenants that during the term that this Note is outstanding,
Maker will reserve from its authorized and unissued Common Stock a sufficient
number of shares to provide for the issuance of the shares upon the conversion
of this Note, from time to time, will take all steps necessary to amend its
Certificate of Incorporation (the "Certificate") to provide sufficient reserves
of shares of Common Stock issuable upon the conversion of the Note.  Maker
further covenants that all shares that may be issued upon the conversion of
this Note and payment of the Conversion Price, all as set forth herein, will be
free from all taxes, liens and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously or otherwise
specified herein).  Maker agrees that its issuance of this Note shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute the issue the necessary certificates
for the shares upon the conversion of this Note.

     10. Whenever the number of shares issuable or the Conversion Price
hereunder shall be adjusted pursuant to Section 7 hereof, the Company shall
issue a certificate signed by its Chief Financial Officer setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the
Conversion Price and number of shares purchasable hereunder after giving effect
to such adjustment, and shall cause a copy of such certificate to be mailed (by
first-class mail, postage prepaid) to Lender.  All notices, advices and
communications under this Note shall be deemed to have been given, if notice is
given as specified in Section 9.7 of the Agreement.

     11. Lender shall be entitled to the registration rights set forth in a
certain Registration Rights Agreement of even date herewith by and between
Maker, Lender and Transport Life Insurance Company.

     12. Any term of this Note may be amended with the written consent of the
Company and the Holder.  Any amendment effected in accordance with this Section
12 shall be binding upon the Holder, each future holder and the Company.  No
waivers of, or exceptions to, any term, condition or provision of this Note, in
any one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, condition or provision.

     13. Maker and any other party now or hereafter liable for the payment of
this Note in whole or in part, hereby severally (i) waive demand, presentment
for payment, notice of nonpayment, protest, notice of protest, notice of intent
to accelerate, notice of acceleration and all other notice, filing of suit and
diligence in collecting this Note, (ii) agree to release of any party primarily
or secondarily liable hereon, (iii) agree that the Lender shall not be required
first to institute suit or exhaust its 


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remedies hereon against Maker or others liable or to become liable hereon or to
enforce its rights against them, and (iv) consent to any extension or
postponement of time of payment of this Note and to any other indulgence with
respect hereto without notice thereof to any of them.
        
     14. This Note will not be transferable at any time on or prior to Maturity
except for transfers to affiliates, successors to the ultimate parent of the
Lender, by operation of law, pursuant to a merger of Lender into another entity
or pursuant to the sale of all or substantially all of the assets of Lender
that are in compliance with all Federal and State securities laws with respect
to this Note.

     15. This Note shall bind Maker and its successors and assigns, and the
benefits hereof shall inure to the benefit of Lender and its successors and
assigns.  All references herein to "Maker" and "Lender" shall be deemed to
apply to Maker and Lender, respectively, and to their respective successors and
assigns.

     16. The corporate law of the State of Indiana shall govern all issues and
questions concerning the relative rights of the Company and its stockholders.
All other questions concerning the construction, validity, interpretation and
enforceability of the Note and the exhibits and schedules hereto shall be
governed by, and construed in accordance with, the laws of the State of
Indiana, without giving effect to any choice of law or conflict of law rules or
provisions (whether of the State of Indiana or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the
State of Indiana.

     17. The Lender and the Maker agree to submit to personal jurisdiction and
to waive any objection as to venue in the federal or state courts in Marion or
Hamilton County, State of Indiana.  Service of process on the Maker or the
Lender in any action arising out of or relating to this Note shall be effective
if mailed to such party at the address listed in Section 10 hereof.

                                     STANDARD MANAGEMENT CORPORATION



                                     BY:   /s/ Paul B. Pheffer
                                        --------------------------------
                                     TITLE:    Executive Vice-President
                                        --------------------------------

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