What is the Exclusion Ratio?
The exclusion ratio is how an insurer determines what part of each annuity payment is a non-taxable return of your original premium, and what part is taxable earnings. It typically applies when you annuitize or buy a single premium immediate annuity (SPIA).
When Does It Apply?
- SPIA income payments.
- Deferred annuities that are annuitized into periodic payments.
It generally does not apply to ad-hoc withdrawals from deferred annuities; those follow annuity taxation rules (e.g., LIFO for non-qualified).
How Is the Exclusion Ratio Calculated?
Insurers use your total “investment in the contract” (your premium minus any prior tax-free amounts) and expected return based on life expectancy or period certain. The ratio is the non-taxable portion of each payment.
Example idea: If your investment in the contract is $120,000 and expected total payments are $200,000, then \[exclusion\ ratio \approx 120,000 / 200,000 = 60\%\]. About 60% of each payment would be a non-taxable return of principal; 40% would be taxable earnings until you recover your basis.
Practical Examples
- Life-only SPIA: Ratio established at issue using age and mortality tables.
- Period certain: Ratio based on the fixed term (e.g., 10 or 20 years).
For personalized estimates, review your contract or call us at 855-583-1104.
Why It Matters
- Determines how much tax you pay on each payment.
- Impacts net income planning and cash flow.
- Helps compare payout options fairly.
Related Resources
Frequently Asked Questions
Does the exclusion ratio change over time?
Generally no. It’s set at issue for SPIA and annuitized payments. If you outlive the expected payout period and fully recover your basis, subsequent payments are fully taxable.
Does the exclusion ratio apply to qualified annuities?
No. Qualified annuity payments are fully taxable because premiums were contributed pre-tax.
How do I estimate my exclusion ratio?
Use your investment in the contract divided by expected total payments. For personalized help, review your illustration or see annuitization payout options.
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