Which concept is related to the term "exclusion ratio"?

The term "exclusion ratio" is primarily associated with annuity payments. In the context of annuities, the exclusion ratio is a calculation used to determine the portion of each annuity payment that is considered a tax-free return of the principal versus the portion that is taxable as income. This ratio is especially relevant for non-qualified annuities, where the investment made in the annuity is not tax-deferred.

When annuity payments are distributed to the policyholder, a portion of those payments is considered a return of the principal investment, which has already been taxed, while the remaining portion represents earnings or interest that is subject to taxation. The exclusion ratio helps in identifying these components of each payment, ensuring that tax implications are accurately calculated for both the issuer and the recipient.

Understanding the exclusion ratio is crucial for individuals receiving annuity payments because it allows them to manage their tax liabilities effectively over the course of receiving these income distributions.