Can't place layered psd

I can't place a layered file in illustrator. it keeps asking me the import options and I have to do a flattened file and then when I update the psd it won't update in Illustrator. I used to be able to do this, but now I can't do it and I don't know how to change that.

You both have this wrong you save your psd as a layered or a flatten psd file. Illustrator will not only not flatten it it does not actually place the file in Illustrator but instead only a proxy for preview. There is essentially a workable proxy.
The reason is if you want to edit the file since it is linked you do so in the program that recognizes that format, like in this case Photoshop. Once eited and resave the proxies preview is updated to reflect those changes.
When you embed an image it either converts the layers to ai objects or flattens the file and it does so per user's selection.
What the op is missing is the option to link which is not in the place options dialog but rather in the placedialog.
This will sound confusing so I will show screen shot

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