State RegulationsMI specificDifficulty 1/5
Under Michigan Administrative Code R 500.601, a transaction is treated as a replacement of life insurance when the existing policy is pledged as collateral or a loan is taken that exceeds what percentage of the policy's loan value?
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
R 500.601(c) defines replacement of life insurance to include pledging or borrowing more than 25% of the policy's loan value, alongside lapse, surrender, conversion to reduced paid-up or extended term, reduction in nonforfeiture value, or reissuance with a reduced cash value. Crossing the 25% threshold triggers the full replacement duties for the agent and the replacing insurer, including the applicant notices and signed statements.
Why the other options are wrong
- A) 10% understates the statutory trigger; borrowing up to that level does not by itself make the transaction a replacement.
- C) 50% doubles the actual threshold and would wrongly exempt loans between 25% and 50% of loan value from replacement rules.
- D) 75% triples the threshold; the rule keys on more than 25% of the policy's loan value.
Memory hook
Borrow a quarter of the loan value and it counts as a replacement.