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                                 VARIFLEX, INC.
        1998 STOCK OPTION PLAN AND COMPENSATION PLAN FOR NON-EMPLOYEE 
                                   DIRECTORS


     1.  PURPOSE.  The purpose of the Variflex, Inc. Stock Option Plan and
Compensation Plan for Non-Employee Directors (the "PLAN") is to promote the
interests of Variflex, Inc. (the "COMPANY") and its stockholders by
strengthening the Company's ability to attract and retain the services of
experienced and knowledgeable non-employee directors and by encouraging such
directors to acquire an increased proprietary interest in the Company.

     2.  SHARES SUBJECT TO THE PLAN.  Subject to adjustment as provided in
Article 6.11, the total number of shares of common stock (the "COMMON STOCK") of
the Company for which options may be granted under the Plan shall be 250,000
shares of Common Stock (the "SHARES").  The Shares shall be shares currently
authorized but unissued or currently held or subsequently acquired by the
Company as treasury shares, including shares purchased in the open market or in
private transactions.  If any option granted under the Plan expires or
terminates for any reason without having been exercised in full, the Shares
subject to, but not delivered under, such options may become available for that
grant of other options under the Plan.  No shares delivered to the Company in
full or partial payment of an option exercise price payable pursuant to Section
6.3 shall become available for the grant of other options under the Plan.

     3.  ADMINISTRATION OF THE PLAN.  The Plan shall be administered by the
Compensation Committee of the Company's Board of Directors (the "COMMITTEE").
Subject to the terms of the Plan, the Committee shall have the power to construe
the provisions of the Plan, to determine all questions arising thereunder, and
to adopt and amend such rules and regulations for administering the Plan as the
Committee deems desirable.

     4.  PARTICIPATION IN THE PLAN.  Each member of the Company's Board of
Directors (a "DIRECTOR") who is not otherwise an employee of the Company or any
subsidiary of the Company and who is not otherwise engaged as a consultant to
the Company or any subsidiary of the Company (an "ELIGIBLE DIRECTOR") shall be
eligible to participate in the Plan.

     5.  NONSTATUTORY STOCK OPTIONS.  All options granted under the Plan shall
be nonstatutory options not intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended.

     6.  OPTION TERMS.  Each option granted to an Eligible Director under the
Plan and the issuance of Shares thereunder shall be subject to the following
terms:

          6.1  Option Agreements.  Each option granted under the Plan shall be
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evidenced by an option agreement (an "AGREEMENT") duly executed on behalf of the
Company and by the Eligible Director to whom such option is granted and dated as
of the applicable date 
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of grant. Each Agreement shall be signed on behalf of the Company by an officer
or officers delegated with such authority by the Committee using either manual
or facsimile signature. Each Agreement shall comply with and be subject to the
terms and conditions of the Plan. Any Agreement may contain such other terms,
provisions and conditions not inconsistent with the Plan as may be determined by
the Committee.

          6.2  Option Grant Size and Grant Dates.
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               6.2.1  Initial Grants.  An option to purchase 4,000 Shares as 
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adjusted pursuant to Article 6.11 (an "INITIAL GRANT") shall be granted to

               a.  each Director who is an Eligible Director on the Effective
          Date (as hereinafter defined), and

               b.  each other Eligible Director immediately following the date
          on which such Director is first elected or appointed as a Director of
          the Company, whichever first occurs; provided, that if an Eligible
          Director who previously received an Initial Grant terminates service
          as a Director and is subsequently elected or appointed to the Board,
          such Director shall not be eligible to receive a second Initial Grant,
          but shall be eligible to receive only Annual Grants as provided in
          Section 6.2.2.

               6.2.2  Annual Grants.  An option to purchase 2,000 Shares as 
                      -------------     
adjusted pursuant to Article 6.11 (an "ANNUAL GRANT"), shall be granted
automatically each year to each Eligible Director who is re-elected or re-
appointed as a Director of the Company and has already received an Initial
Grant, such grant to be made immediately following the date on which such re-
election or re-appointment occurs.

          6.3  Option Exercise Price.  Each Agreement shall state the exercise
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price per share of the shares of Common Stock to which it relates.  The exercise
price per share of Common Stock subject to an option shall not be less than 100%
of the fair market value ("FAIR MARKET VALUE") per share of such Common Stock at
the close of business on the day of the grant of the option.  For purposes of
this Plan, Fair Market Value on any date shall be the closing price per share of
Common Stock on such date as reported on the Nasdaq National Market.

          6.4  Exercisability.  Subject to Section 6.7, an option shall become
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exercisable on the first business day prior to the first anniversary of the day
on which such option was granted, if the optionee has continued to serve as an
Eligible Director until that day.

          6.5  Time and Manner of Option Exercise.  Any vested and exercisable
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option is exercisable in whole or in part at any time or from time to time
during the term of the option by giving written notice, signed by the person
exercising the option, to the Company stating the number of Shares with respect
to which the option is being exercised, accompanied by payment in full of the
option exercise price for the number of Shares to be purchased and by the
payment or making provision satisfactory to the Company for the payment of any
taxes which the 

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Company is obligated to collect with respect to the issue or transfer of the
Shares upon such exercise. The date both such notice and payment are received by
the office of the Secretary of the Company shall be the date of exercise for the
stock option as to such number of Shares. No option may at any time be exercised
with respect to a fractional Share.

          6.6  Payment of Exercise Price.  Payment of the option exercise price
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may be in cash or payment may be in whole or part by:

               a.  transfer to the Company of shares of Common Stock having a
          Fair Market Value equal to the option exercise price at the time of
          such exercise, or

               b.  delivery of instructions to the Company to withhold Shares,
          that would otherwise be issued on such exercise of the option, having
          a Fair Market Value at the time of such exercise equal to the total
          option exercise price of the options being exercised.

     If the Fair Market Value of the number of whole shares transferred or the
number of whole option Shares surrendered is less than the total exercise price
of the option being exercised, the shortfall must be made up in cash.

          6.7  Terms of Options.  Each option shall expire ten years from its
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date of grant, but shall be subject to earlier termination as follows:

               a.  In the event of the termination of an optionee's services as
          an Eligible Director by reason of voluntary mid-term retirement,
          declining to stand for re-election, becoming a full time employee of
          the Company or a subsidiary of the Company or becoming disabled, all
          options granted pursuant to this Plan but unexercisable pursuant to
          Section 6.4 shall automatically expire and shall not be exercisable
          and all options exercisable pursuant to Section 6.4 but unexercised
          shall continue to be exercisable until the stated expiration date of
          such options.

               b.  In the event of the death of an optionee while the optionee
          is an Eligible Director, the then outstanding options of such optionee
          that have vested pursuant to Section 6.4 shall be exercisable for one
          year from the date of the death of the optionee or until the stated
          grant expiration date, whichever is earlier, by his/her successors in
          interest, in accordance with the paragraph below.  However, all
          options which have been granted, but have not become exercisable
          pursuant to Section 6.4, shall automatically expire.

               c.  In the event of the termination of an optionee's service as a
          Director by the Board of Directors for cause or the failure of such
          Director to be re-elected (other than for the reasons set forth in
          Section 6.7(a) or (b)), the Committee in its sole discretion can
          cancel the then-outstanding options of such optionee, including those
          options which are exercisable and such options shall automatically
          expire and become non-exercisable on the effective date of such
          termination.

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     Exercise of a deceased optionee's options that are still exercisable shall
be by the estate of such optionee or by a person or persons whom the optionee
has designated in writing filed with the Company, or, if no such designation has
been made, by the person or persons to whom the optionee's rights have passed by
will or the laws of descent and distribution.

          6.8  Transferability.  The right of any optionee to exercise an option
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granted under the Plan shall, during the lifetime of such optionee, be
exercisable only by the optionee and shall not be assignable or transferable by
such optionee other than by will or the laws of descent and distribution.

          6.9  Limitation of Rights.
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               6.9.1  Limitation as to Shares.  Neither the recipient of an 
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option under the Plan nor an optionee's successor or successors in interest
shall have any rights as a stockholder of the Company with respect to any Shares
subject to an option granted to such person until the date of issuance of a
stock certificate for such Shares.

               6.9.2  Limitation as to Directorship.  Neither the Plan, nor 
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the granting of an option, nor any other action taken pursuant to the Plan shall
constitute or be evidence of any agreement or understanding, express or implied,
that an Eligible Director has a right to continue as a Director for any period
of time or at any particular rate of compensation.

          6.10 Regulatory Approval and Compliance.  The Company shall not be
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required to issue any certificate or certificates for Shares upon the exercise
of an option granted under the Plan or to record as a holder of record of Shares
the name of the individual exercising an option under the Plan, without
obtaining to the complete satisfaction of the Committee the approval of all
regulatory bodies deemed necessary by the Committee and without complying, to
the Committee's complete satisfaction, with all rules and regulations under
federal, state, or local law deemed applicable by the Committee.

          6.11 Capital Adjustments.  The aggregate number and class of Shares
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subject to and authorized by the Plan, the number of class of Shares with
respect to which an option may be granted to an Eligible Director under the Plan
as provided in Article 6, the number and class of Shares subject to each
outstanding option, and the exercise price per share specified in each such
option shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a split-up or
consolidation of shares or any like capital adjustment or the payment of any
stock dividend, or other increase or decrease in the number of such Shares
effected without receipt of consideration by the Company.

     7.   COMPENSATION OF ELIGIBLE DIRECTORS.  In addition to the Initial and
Annual Grants provided for in Article 6 above, each Eligible Director shall
receive the following amounts:

          7.1  Personal Attendance at Board Meetings.  One Thousand Dollars 
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($1,000) for each meeting of the Board of Directors of the Company which such
Eligible Director attends in person.

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          7.2  Personal Attendance at Committee Meetings.  Five Hundred Dollars
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($500) for each committee meeting of the Board of Directors of the Company which
such Eligible Director attends in person.  No Eligible Director shall receive
compensation as set forth in this Section 7.2 for any Committee meetings
attended in connection with the Plan or for any meetings attended as a member of
the "Plan Committee" under the 1994 Variflex Stock Plan.

          7.3  Participation Other Than in Person.  Two Hundred Fifty Dollars 
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($250) for each meeting of the Board of Directors or any committee thereof of
the Company which such Eligible Director does not personally attend but in which
he or she participates by telephone.

     8.   EFFECTIVE DATE AND TERM OF THE PLAN. The Plan shall be effective as of
March 16, 1998 (the "EFFECTIVE DATE"). The Plan shall continue in effect until
it is terminated by action of the Board of Directors of the Company or by the
Company's stockholders, but such termination shall not affect the terms of
outstanding options.



     This Plan has been adopted by the entire Board of Directors, including the
non-employee directors, and ratified and approved by the written consent of the
holders of a majority of outstanding capital stock.




                              /s/ Randall L. Bishop
                              ----------------------------
                              Randall L. Bishop, Secretary

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