How Does LIC Work?

Today, LIC works with over 2,000 branch offices spread across the country, enabling easier access to life insurance for people even in the remotest corners.

What is LIC?

LIC was formed in 1956 by merging over 200 working insurance companies at the time. Then the merging entity offered various insurance policies as per the customers demands of short-term or long-term policies. LIC has introduced various endowment plans, term insurances, ULIPs, money-back schemes, and even pension plans for elderly people. The company has also been keeping up digitally with its online portal and payment gateways. A major goal accomplished by the company was to spread the idea of life insurance to the entire insurable section of society, including the rural areas.

A few noteworthy facts about LIC:

• LIC reported an individual death claim settlement ratio of 96.81% in Q1 FY27.

• LIC operates through 113 divisional offices, 2048 branch offices, 8 zonal offices, and 1381 satellite offices.

• It has tied up with leading banks to facilitate online premium collection for LIC policies.

• It functions through a network of over 1,434,121 insurance agents.

• LIC launched their IPO on May 4, 2022.

How LIC Works?

Life Insurance Corporation of India (LIC) works as an insurance provider that offers life cover to the policyholders in exchange for a premium. The collective premiums are then used to invest in market-linked funds and government securities. The returns on these investments are then used at the time of claim settlement in the form of death, maturity, survival benefits for the policyholder and his/her family. The basic idea is to offer financial protection to the dependents of the life assured on her/his untimely death for a fee. LIC has also introduced LIC calculators for people to get estimates of their policy.

What are LIC’s Objectives?

LIC has standard objectives to base its insurance business on. It works on certain functions to ensure maximum benefit for its customer while maintaining a profit margin. Some of these are:

• Its primary objective is to enhance access to comprehensive life insurance in the economically backward and low-income sections of society.

• It promotes disciplined savings for its customers through investments in ULIPs, endowments, and pension schemes.

• It maximizes the movement of public funds across a balance of high-risk and low-risk investment portfolios.

Understanding the Working of LIC

LIC of India offers a life insurance contract between the buyer and itself that eliminates the financial risk after the policyholder’s death by pledging a sum to the dependents, thereby substituting a loss of income. It encourages long-term savings for future needs through easy and affordable premium payments.

To understand what LIC is and how LIC works, it is important to study each aspect of life insurance plans.

Contract of Insurance

Once you propose a life insurance cover for yourself, LIC furnishes a life contract of utmost good faith to financially protect your dependents in the event of your unfortunate demise. LIC accepts the risk of your death, provided that no information was misrepresented. The company conducts thorough background checks, and if any information were found to be wrongfully withheld, it would imply a breach of the contract of insurance.

Premiums

Against the contract of life cover, LIC charges a premium amount after carefully evaluating the risk profile of the insured, their income, medical history, number of dependents, etc. The premiums charged are in proportion to the death risk of the policyholder and the sum assured. Usually, premiums increase with age and vary per the lifestyle of the insured. Note that a policy shall lapse if premium payments are not continued. This is part of how LIC policy works and the mechanisms in place to maintain the policy.

Investments

LIC pools all its premium collection and invests at least 75% of it in government securities. This makes sure that the policyholders' money is safe while also earning extra returns. The remaining capital from premiums is invested in market-linked stocks, equities, and corporate bonds. The return on these investments is how LIC works to earn its profit and settle death and maturity claims.

Note that death and maturity benefit amounts are fixed at the time of policy issuance. Based on LIC’s valuation in a particular year, it may add bonus amounts to the assured benefits.

LIC also offers loan benefits to its customers under certain plans, which the policyholder is liable to return with interest.

Claim Settlement

Claim settlement is the most crucial aspect in the working of LIC. Every year, it receives a large number of claims. Now LIC uses the funds generated through the collective investments to settle the claim amount. Note that the company can easily cancel a claim if any information was found to have been withheld.

This shows how LIC policy works and the company’s commitment to ensuring transparent and fair claim settlements. LIC offers its insurance products through its vast distribution network, consisting of individual agents, branch offices, and bancassurance partnerships. It has teamed up with over 40 leading banks in India to promote its life insurance policies.

Financial Protection

The main goal of LIC is to offer financial protection to the family of the policyholder or the beneficiaries in case of the policyholder's demise or to offer a lump sum amount in case of maturity.

Types of LIC Policies

• Endowment Plans - Endowment plans offer a combination of savings and life cover. The premiums from such plans are not invested in market-linked funds and are therefore considered low-risk plans.

• Whole-life Plans - These plans are those that cover the risk of the insured’s death throughout her/his lifetime. On the death of the policyholder, dependents receive the assured death benefit amount.

• Money-back Plans - Money-back insurance policies are those that offer periodic payouts on surviving certain policy years. The amount payable is subject to a percentage of the sum assured.

• Term Plans - Term insurance plans provide risk protection for the life assured only for a specific period of time. Only if the death of the policyholder occurs during this term, dependents receive the assured death benefit.

• Pension Plans - Pension plans are savings options that also come with a life cover. On vesting and if you survive the policy term, LIC is liable to pay you the sum assured as a lump sum payout or as a regular stream of income.

• ULIPs - ULIPs are high return investment options, wherein a part of your premiums are invested in market-linked funds, and the remaining goes towards your life cover.

Is Choosing LIC a Good Option?

LIC of India works by deploying your money paid as premiums to investment avenues, generating returns, and then subsequently using them to pay off claims. It works to the best advantage of its investors without risking the entire sum in market funds. It invests a majority of the collective premiums on government securities that come with the sovereign guarantee of the Government of India.

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