What is the term for the relationship between the total investment in an annuity and the total expected return?

The relationship between the total investment in an annuity and the total expected return is referred to as the exclusion ratio. This term describes the proportion of each annuity payment that is considered a return of the investment, which is typically not taxable, compared to the portion that represents earnings, which is taxable.

The exclusion ratio is important because it helps determine how much of each payment an investor can receive tax-free. In the context of annuities, the total investment includes the premiums paid, while the expected return consists of the sum of all payments anticipated over the annuity’s lifetime.

Understanding the exclusion ratio allows policyholders and investors to better plan their finances, as they can assess how much of their annuity income will be subject to taxation versus how much will serve as a return of their principal investment.