MONEY TALK By Andrew Verity BBC News Personal Finance Correspondent

Most of these policies are known as "with-profits" - and they have performed spectacularly compared to the stock market.

But how did they manage that? And, more importantly, can it possibly stay that way?

In spite of bonus cuts by many life insurers, "with-profits" policies have on average grown in value by 4% in the year to 2002.

What is more, since 1997 with-profit funds have grown by a healthy 31.5% outperforming the FTSE All share.

Numerous surveys have shown that the majority of with-profits savers are never made aware where their money goes.

With-profits investments are the way most British people invest when they are looking for faster growth than a building society savings account.

They pay premiums into the with-profits policy, which can be an endowment, a pension or an investment plan.

Savers in ignorance

Numerous surveys have shown that the majority of with-profits savers are never made aware where their money goes.

Their premiums are pooled in the main "life fund" with those of other "with-profits" investors. The money is then invested, most of it in shares, with some going into bonds, property and cash.

Five year investment performance FTSE All Share fund - 12.4% With-profits fund + 31.5% Source: TrustNet

If the fund's assets grow, so does the fund, and therefore so does each policyholders share of those assets (or "asset share").

But at first sight that is a puzzle. If the stock market has been shrinking for the last three years, and life insurers funds are invested on the stock market, then their funds must also have been shrinking.

Planning ahead

So how do they keep up their payments?

The answer is that they have built up reserves over the years for exactly this purpose.

In the stock market boom, life insurers' coffers were swelled.

Instead of paying massive annual bonuses (the with-profits equivalent of interest), they tucked some of the gains away, so they would be able to keep up bonuses (and therefore payouts) from with profits policies if the stock market had a poor year.

The trouble is the stock market slump has been deeper and more prolonged than any of them anticipated.

To keep payouts up, life insurers have been paying out much more to policyholders than their share of the assets is worth.

To do that they have to dig into their free assets - the surplus money they have over and above what they have guaranteed to pay out.

The trouble is life insurers can only dig into their reserves if they have reserves in the first place

According to independent analysts Cazalet Financial Consulting, life insurers' funds will have shrunk on average by 35% over the last three years, including share prices falls as well as other costs.

On Cazalet's estimate, to keep up the value of with-profits policies, life insurers have dug into their assets to the tune of a massive �200bn.

Existing with-profits policyholders should be glad to benefit from such a huge transfer of wealth over the last few years.

Unlike those who invested in a stock market fund - or whose policies were not "with-profits" but linked directly to the stock market (unit-linked) - they have largely been shielded from the biggest destruction of wealth in 30 years.

Safety net squandered

But can it stay that way?

The trouble is life insurers can only dig into their reserves if they have reserves in the first place.

Now the vast bulk of those reserves have been spent, life insurers have much less capacity to protect investors from stock market falls in the future.

So for existing investors, the with-profits way of investing has benefited them massively and in most cases independent financial advisers say they should keep their policies to maturity.

Rebuilding trust

To make the with-profits concept work, life insurers are going to have to rebuild their reserves.

Many of them now have less than half their funds in shares. So if the stock market does pick up, they are in a poorer position to benefit from any growth than in the past.

Even if the assets grow well, life insurers will no longer be able to pay as much, or more, than they make on those assets.

Instead, they will have to pay less in payouts and bonuses than they make on the market so some can be tucked away to rebuild the reserves.

On that basis, a new investor would be likely to make substantially less money in the next few years than they would if their money was directly tied to the performance of the stock market.

If there is one investment slogan that's been well proved it is that past performance is no guide to the future.

For those starting to invest today, with-profits is unlikely to work so well - and may well perform worse, not better, than other investments.