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Sovereign Guarantee; the back bone of LIC of India's policies

Life insurance has become virtually ubiquitous in wealth planning. It is flexible, can be adapted to a wide range of purposes, enjoys very favourable tax treatment in most if not all jurisdictions and is virtually universally recognized. Life insurance can be used to preserve and increase wealth as well as pass it on to the next generation in a very tax-efficient manner. The main benefits are taken in turn.

Life Insurance Corporation of India (LIC) is an Indian government insurance owned and investment corporation having the largest customer base. LIC was established in the year 1956 after the Indian Parliament passed an act to nationalize the private insurance industry and the main objective of the nationalization of LIC Life Insurance was to eliminate the risk of loss and to provide money protection to the policyholder.

In our country more than 20 life insurance companies are providing best and beneficial policy plans according to customer's wish then If you are thinking why to choose LIC investments compared to other life insurance companies. Here I'm going to discuss a hidden fact that LIC is the one and only insurance company governed and sovereign guaranteed by the central government under IRDA.

LIC policyholders enjoy a sovereign guarantee on the sum assured and the bonus declared as per section 37 of LIC Act, 1956 which clearly states that " Policies to be guaranteed by Central Government- The sum assured by all policies issued by the corporation including any bonuses declared in respect thereof and, subject to the provisions contained in section 14 the amounts assured by all policies issued by any insurer the liabilities under which have vested in the corporation under this act, and all bonuses declared in respect thereof, whether before or after the appointed day, shall be guaranteed as to payment in cash by the Central Government."

In the case of LIC of India v. Insure Policy Plus Services Pvt. Ltd. & Others [Civil Appeal No. 8542 of 2009], the Honourable supreme court clearly stated that Life Insurance Policies, in general, are a measure of social security for the family members of the life assured and in the absence of adequate savings or securities, these policies are often the only financial security available to the family members of the deceased life assured. The Government of India has guaranteed the sum assured with bonus in all LIC policies under section 37 of the Life Insurance Corporation Act,1956 to ensure the availability of financial security to the family of the deceased.

The another advantage of LIC is stated under Section 38 of LIC Act, 1956 that there is no liquidation provision of law relating to the winding up of companies or corporations shall apply to the Corporation established under the Act, and the Corporation shall not be placed in liquidation save by order of the Central Government and in such manner as that Government may direct.

The Honourable Supreme Court has also marked in the judgment LIC of India v. Insure Policy Plus Services Pvt. Ltd. & Others [Civil Appeal No.8542 of 2009], and referred in the case Rajesh Kumar Thakur and others v. Cherian and Others [2019] that by choosing LIC to invest the same in annuities is not difficult to guess as the purchasing of an annuity from the Life Insurance Corporation of India is not comparable to any kind of investments because all contracts of insurance entered into by the LIC are backed by a government guarantee which is provided by section 37 of the LIC Act, 1956. Therefore, from the point of view of safety and security of the amounts of the superannuation fund, an investment in an annuity through the LIC, provides valuable security to a beneficiary. By ensuring that the investment is made in a manner which ensures the safety of the fund and the payment of an annuity.

On 2020, Finance Minister Nirmala Sitharaman declared that the government is likely to retain the sovereign guarantee to Life Insurance Corporation (LIC) and protect interests of policyholders as it seeks to list the insurance behemoth with the aim of improving disclosures, unlocking massive value and sharing wealth with investors. The government has also decided to retain a clause that allows the insurer to regulate the terms and conditions of its agents and the recruitment procedure for employees and agents. The provision gives power to the insurer to decide on the commission benefits of over 13 lakh agents.

The finance ministry has circulated a draft cabinet note on the changes to be made to the legislation before it is taken up for approval in the monsoon session of Parliament. LIC, which is governed by a 50-year-old Act, has government backing for all its policies. The public-sector behemoth had 65% market share in first-year premium and 70.8 % share in total policies in 2010. The insurer sold over 37 million policies in the last fiscal.

The relaxation in sovereign backing comes despite the government tightening conditions under which such guarantee can be made available. The Standing Committee on Finance had strongly opposed the provision in the Bill that empowered the government to limit the extent of sovereign guarantee. The account would be utilized by the government for any purpose it decides on, while the rest would be paid as dividend. At present, the insurer is required to set aside at least 95% of the surplus, while rest goes to the government. This has been one of the main selling points for LIC policies.

As we have all learned in a very real way during the COVID-19 pandemic, life is precious. Life insurance is just one of many tools to make sure you and your family has peace of mind when it comes to your overall financial health. LIC policyholders enjoy a sovereign guarantee on the sum assured and the bonus declared and this is one of the main attractions of LIC; for succession planning, properly set up, the entire payout when the insured event takes place can be completely free of tax.

Award Winning Article Is Written By: Ms.Arya Nair
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