Final answer:
In an Adjustable Life policy, actions that increase the insurer's risk, such as increasing the death benefit or converting coverage from term to permanent, usually require proof of insurability to mitigate adverse selection.
Step-by-step explanation:
When discussing adjustments to an Adjustable Life policy, certain actions may require the policy owner to provide proof of insurability. This typically includes any situation where the risk to the insurer is increased, such as increasing the death benefit or changing the type of coverage from term to whole life insurance. However, simple changes like decreasing the death benefit or changing the premium payment schedule generally do not require new evidence of insurability.
Insurance companies are concerned with adverse selection, which occurs when individuals with a higher likelihood of making a claim are more inclined to purchase or increase insurance coverage. To mitigate this risk, insurers require proof of insurability when the requested policy changes could potentially increase their financial exposure. It is a way for insurance companies to manage and balance the risks across all policyholders.
- Increasing death benefit usually requires proof of insurability.
- Converting from term to permanent insurance may require proof of insurability.
- Decreasing coverage or premiums typically does not require proof of insurability.