That's an orthogonal feature, it writes output after each line as opposed to every 4096 bytes, when the output is a pipe instead of a terminal. Useful when the other end of the pipe still goes to the terminal and you want to see it immediately. If `some-util-with-output` echoes stdin then without the option the following would not show you the latest grepped lines until the 4096 buffer fills.

  tail -F output.log | grep --line-buffered TEXT | some-util-with-output