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?

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.