Originally they developed as a means of distributing unplanned surplus, arising e.g. from lower than anticipated death rates.
More recently they have been used to provide flexibility to pursue a more adventurous investment policy to aim to achieve long-term capital growth.
They have been accepted as a form of long-term collective investment whereby the investor chooses the insurance company based on factors such as financial strength, historic returns and the terms of the contracts offered.
The premiums paid by with-profits and non-profit policyholders are pooled within the insurance company's life fund (Commonwealth) or general account (USA).
A large part of the life fund is invested in equities, bonds, and property to aim to achieve a high overall return.
Various models have been adopted by different insurers, but typically either: Endowments still retain a basic sum assured (in most cases) although this may be notional rather than a structural part of the policy.
The terminal bonus represents the member's entitlement to a proportion of the fund that has been held back for the purpose of smoothing.
In certain circumstances a Market Value Adjustor may be applied to reduce the overall policy value to limit the payout to a reasonable multiple of the member's fair share.
After a period of poor investment performance the value of the withdrawal is reduced to reflect the reduction in the underlying value of the assets of the life fund.
Years of steady reliable returns in combination with unscrupulous sales tactics from insurers fostered the impression that a 'low-risk' investor should invest in with-profits.
This perceived low risk belied the reality of the underlying investment strategies of many insurers who used high equity exposure and high-risk financial instruments to achieve the returns.
These documents, although very detailed, are largely incomprehensible for consumers and are thought to be of use only for independent financial advisers and other industry professionals, and also to act as a constraint on how the company distributes surplus.
The realistic reporting method has been cited as a factor contributing to the demutualisation of Standard Life Assurance Company.
The National Association of Insurance Commissioners (NAIC) provides suggested guidelines which each state is free to follow or not.
Alternatives such as a more fund-type product, CPPI or smoothed managed funds are yet to show a significant popularity amongst consumers.