Non-Qualified Annuity Options

During the distribution phase (annuitization), part of each non-qualified annuity payment is a non-taxable return of the owner's investment; the balance of each payment is taxable income. The taxable and non-taxable parts of the payments are determined by an exclusion ratio.

The insurance company determines the non-taxable portion of each payment using an exclusion ratio for a fixed annuity based on the annuitant's age and the contract's period certain. The exclusion ratio for a variable annuity is determined by dividing the investment in the contract by the total number of expected payments.

• If an annuitant dies before recovering his or her investment in the contract, the beneficiary will receive the balance of the remaining payments tax-free until the annuitant's investment in the contract has been recovered. Then, all payments are fully taxed.
• If an owner dies before recovering his or her full investment, the annuity payments stop and the unrecovered portion will be deductible in the owner's last taxable year.

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