I'll meet you in the middle: an LLM "understands" words in the same way a toddler understands the phrases they say. "My want cookie!" The toddler has zero comprehension of what any of those words mean, but they know that saying them in that order might result in something desirable.
An LLM has zero understanding of "my", "want", or "cookie" because an LLM has no id/ego, has never felt desire, and has never eaten a cookie.