How Does LIC Work?

About LIC

LIC was created in 1956 with the merger of over 200 insurance companies that were operating at that time. The merged entity was created to offer wide-ranging insurance schemes to its customers, serving various short-term and long-term goals. As of today, LIC has introduced traditional endowment-based plans, term insurance, ULIPs, money-back schemes, and pension plans, among others. 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 the society, including the rural areas. 

A few noteworthy facts about LIC:

• LIC reported a claim settlement ratio of 98.62% in FY 2020-21. 

• 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 against LIC policies. 

• It functions through a network of over 1.5 lakh insurance agents.

How Does LIC Work?

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 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 the public funds across a balance of high-risk and low-risk investment portfolios.

Understanding the Working of LIC

LIC offers a life insurance contract between the buyer and itself that eliminates the risk of 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 how LIC works, it is important to study each aspect of life insurance. 

1. Contract of Insurance

   Once you propose a life insurance cover for yourself, LIC furnishes a life contract of 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. 

2. 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. 

3. 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 the company earns its profit and settles 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 interests.  

4. 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. 

   LIC offers its insurance products through its vast distribution network, comprising 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. 

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 as 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 plans offer life cover protection only for a specified period. Only if the death of the policyholder occurs during this term, dependents receive the assured death benefit. 

• Pension Plans - Pension plans are savings option that also comes 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. 

In Conclusion!

LIC 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 on market funds. It invests a majority of the collective premiums on government securities that come with the sovereign guarantee of the Government of India.

LIC Resources