Banking and Insurance - Laws and Practice · Life Insurance

Section 14 LIC Act: Power to Modify Life Insurance Contracts

Updated 11 October 2026 · Fact-checked

Section 14 of the Life Insurance Corporation Act, 1956 lets LIC reduce the amounts of insurance under life contracts made by a taken-over insurer before 19 January 1956. It must consider that insurer's financial condition on the appointed day, and act only through a scheme approved by the Central Government.

Understand Power to Modify Contracts of Life Insurance

When LIC was set up, the controlled business of many private life insurers was transferred to and vested in it. Some of those insurers were financially weak. Their policies promised more than their assets could support.

Section 14 deals with this problem. It gives the Corporation a power to reduce the amounts of insurance under old contracts. It is an exception to the general rule that one party cannot cut its promised sum unilaterally.

The power is narrow. It applies only to contracts of life insurance entered into by the transferor insurer before the 19th day of January, 1956. It applies only where that insurer's controlled business was transferred to and vested in the Corporation. The Corporation must have regard to the insurer's financial condition on the appointed day.

The power has a safeguard. The proviso says no reduction can be made except under a scheme prepared by the Corporation and approved by the Central Government. So LIC cannot act case by case on its own. It needs an approved scheme first.

The section says the Corporation may reduce amounts in such manner and subject to such conditions as it thinks fit. This gives wide discretion on how, but only within the scheme. Note that the text speaks of reducing amounts. It does not give a general power to rewrite every term.

Key rules to remember

Core power: LIC may reduce the amounts of insurance under life contracts of a transferor insurer; The text speaks of reducing amounts of insurance. Do not describe it as a power to increase or cancel.
Cut-off date for contracts: Contract entered into before 19 January 1956; Contracts made on or after this date are outside Section 14.
Factor to consider: Financial condition of the insurer on the appointed day; The insurer is one whose controlled business was transferred to and vested in LIC.
Proviso (safeguard): Reduction only by a scheme prepared by LIC and approved by the Central Government; No approved scheme means no valid reduction.
Manner and conditions: Such manner and subject to such conditions as the Corporation thinks fit; Discretion is wide but works within the approved scheme.

How to solve Power to Modify Contracts of Life Insurance questions

Use this order for any fact-based question on Section 14. Written answers score on provision, analysis and conclusion.

1State the provision: LIC may reduce amounts of insurance under life contracts of a transferred insurer.
2Check the insurer: was its controlled business transferred to and vested in LIC?
3Check the contract date: was it entered into before 19 January 1956?
4Check the basis: did LIC have regard to the insurer's financial condition on the appointed day?
5Check the proviso: was there a scheme prepared by LIC and approved by the Central Government?
6Identify what was done: a reduction of amounts is covered; other changes need separate authority.
7Conclude clearly: valid if all conditions are met, otherwise not authorised under Section 14.

Quickest way: Four-test checklist

When to use it: Use it for short-note or case questions when time is tight.

Test 1: Transferor insurer, with business vested in LIC?
Test 2: Contract made before 19 January 1956?
Test 3: Action is a reduction of insurance amounts?
Test 4: Scheme by LIC approved by the Central Government?
All four met means valid. Any one missing means the power is not available.

Common mistakes in Power to Modify Contracts of Life Insurance

Saying LIC can modify any policy at any time.
The topic title says 'modify contracts', which sounds general.
Fix: Limit it to pre-19 January 1956 contracts of transferor insurers and to reduction of amounts.
Forgetting the Central Government's approval.
Students focus on LIC's power and skip the proviso.
Fix: Always write that a scheme prepared by LIC and approved by the Central Government is a must.
Confusing Section 14 of the LIC Act with Section 14 of the Insurance Act, 1938.
Both sections carry the same number.
Fix: Name the Act. Insurance Act Section 14 is about records of policies and claims.
Mixing it up with Section 61 of the Insurance Act.
Both deal with reducing insurance contracts.
Fix: Section 61 lets the Tribunal reduce contracts of an insurer in liquidation or insolvent, on application. Section 14 is LIC's own power under an approved scheme.
Ignoring the appointed-day financial condition.
It reads like a minor phrase.
Fix: State it as the factor LIC must have regard to when deciding the reduction.
Citing a case name from memory.
Students search for case law on this section.
Fix: Do not cite a case unless you are sure of it. A correct statutory analysis scores better than a doubtful case.

Worked examples

Example 1

An insurer's controlled business vested in LIC. It had issued a life policy in 1954. LIC, after considering the insurer's financial condition on the appointed day, reduces the sum assured under a scheme approved by the Central Government. The policyholder objects. Advise.

Show the solution

Provision: Section 14 of the LIC Act, 1956 lets LIC reduce amounts of insurance under life contracts entered into before 19 January 1956 by a transferred insurer.
Facts: the insurer's business vested in LIC and the policy was issued in 1954, which is before the cut-off date.
Basis: LIC considered the insurer's financial condition on the appointed day.
Safeguard: the reduction was made under a scheme approved by the Central Government, as the proviso requires.
Conclusion: all conditions are met.

Answer: The reduction is within LIC's power under Section 14, so the objection fails.

Example 2

LIC reduces the sum assured under a policy issued by a transferred insurer in 1958, without any scheme. Is the action valid under Section 14?

Show the solution

Provision: Section 14 covers only contracts entered into before 19 January 1956.
The policy was issued in 1958, so it falls outside the section.
Proviso: no reduction may be made except under a scheme prepared by LIC and approved by the Central Government. None exists here.
Two conditions fail: the contract date and the approved scheme.

Answer: The action is not authorised under Section 14, so the reduction is invalid.

Exam tips

Write the cut-off date 19 January 1956 exactly and tie it to the contract date.
Always mention the proviso: scheme prepared by LIC and approved by the Central Government.
For comparison questions, contrast with Section 61 of the Insurance Act, where the Tribunal reduces contracts of an insurer in liquidation or insolvent.
Use the order provision, facts, analysis, conclusion in case questions.

Practice questions from Life Insurance

Power to Modify Contracts of Life Insurance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Power to Modify Contracts of Life Insurance: frequently asked questions

What does Section 14 of the LIC Act, 1956 say?

It lets LIC reduce amounts of insurance under life contracts entered into before 19 January 1956 by an insurer whose business was transferred to it. LIC considers the insurer's financial condition on the appointed day. The reduction must follow a scheme approved by the Central Government.

Can LIC modify any current policy under this section?

No. The section covers only contracts made before 19 January 1956 by transferred insurers. Current policies are outside it.

Who approves the reduction scheme?

The Central Government approves it. LIC prepares the scheme, and no reduction can be made except in accordance with the approved scheme.

How is Section 14 different from Section 61 of the Insurance Act, 1938?

Section 14 is LIC's power under a Government-approved scheme for old contracts. Section 61 lets the Tribunal reduce contracts of an insurance company in liquidation or an insolvent insurer. An application may be made by the liquidator, the company, a policyholder or the Authority.