Exclusion Ratio

What Does Exclusion Ratio Mean?

The exclusion ratio is the portion of an annuity payment that represents the return of the annuitant’s investment rather than taxable income from the annuity. This amount is not subject to taxes and is received alongside the taxable portion of the annuity payment.

Insuranceopedia Explains Exclusion Ratio

When the owner of an annuity begins to receive payments (assuming the annuity has been paid in full), the payments can be classified into two categories: taxable and non-taxable.

The taxable portion is considered income from the annuity, which may serve as replacement income during retirement.

The non-taxable portion, known as the exclusion ratio, represents the owner’s way of recouping their investment. The investment in the annuity is fully recoverable.

The exclusion ratio is one of several tax rules that apply to insurance products. For a broader look at whether life insurance payouts are taxable, the same general principle applies: money you already paid in is treated differently from earnings. If you’re still deciding whether an annuity is the right fit, our guide on how annuities work covers the types available and what to expect from each.