State RegulationsMI specificDifficulty 1/5
Under Michigan's life insurance replacement rules, pledging or borrowing against an existing policy counts as replacement when the loan or pledge exceeds what portion of the policy's loan value?
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why C is correct
Michigan Administrative Code R 500.601(c) includes, within the definition of replacement, the pledging or borrowing of more than 25% of a policy's loan value. Crossing that threshold triggers the same notice, disclosure, and reporting duties as a surrender or lapse used to fund new coverage, because substantial policy borrowing can strip an existing policy of its value just as effectively. Producers therefore need to ask about existing-policy borrowing whenever they take a life insurance application.
Why the other options are wrong
- A) A specific threshold applies; not every policy loan or pledge constitutes a replacement.
- B) An outright surrender is one form of replacement, but substantial borrowing can also constitute replacement even though the policy stays in force.
- D) The trigger is the size of the borrowing relative to the policy's loan value, not the use of the loan proceeds.
Memory hook
Borrow past a quarter of the loan value and you have replaced.