Definition - What does Exclusion Ratio mean?
Exclusion ratio is the amount paid to the annuitant that represents the return of investment rather than income from the annuity. This amount is not subject to taxes. It is received along with the taxable payment of the purchased annuity.
Insuranceopedia explains Exclusion Ratio
When the owner of an annuity starts to get paid (assuming he or she has paid the annuity in full), the payment he or she receives can be classified into two: taxable and non-taxable.
The taxable part is perceived as income he or she gets from the annuity (or even replacement income since annuity payment comes during retirement).
The non-taxable part or the exclusionary ratio is the way the owner of the annuity can recoup his or her investment. The investment for annuity is hundred percent recoverable.