Exclusion Ratio

Exclusion Ratio in an Indexed Universal Life insurance policy refers to the portion of the policy's payouts that can be excluded from taxable income. This ratio is determined by dividing the total amount of premiums paid by the expected return from the policy.

Essentially, it helps in identifying the amount of each annuity payment that can be considered a return of principal (and therefore non-taxable) as opposed to the interest or gains earned (which may be subject to tax). By applying the Exclusion Ratio, policyholders can maximise the tax efficiency of their IUL policy's income stream.