Free Withdrawal
A free withdrawal is an amount the consumer can withdraw from a deferred annuity each year without triggering a surrender charge or market value adjustment, even during the surrender period. The typical free withdrawal amount is 10% of the contract value per year, though some contracts allow as little as 5% and a few allow up to 15%. The free withdrawal amount typically resets each contract anniversary and does not accumulate if unused in a given year.
A 60-year-old places $200,000 in a 7-year MYGA with a 10% annual free withdrawal provision. In year three, she needs $20,000 for a home repair. The free withdrawal covers the full amount — no surrender charge, no MVA. She receives the full $20,000. In year four, she takes no withdrawal. In year five, she needs $40,000. The free withdrawal covers $20,000 (10% of the current contract value); the remaining $20,000 is subject to surrender charge and MVA. If the year-5 surrender rate is 5%, the surrender charge on the excess $20,000 is $1,000.
Why it matters
The free withdrawal provision is the consumer's liquidity safety valve. It allows for unexpected expenses, RMDs (for qualified contracts), and lifestyle changes during the surrender period without triggering a large penalty. For consumers expecting to take regular distributions during the surrender period, the free withdrawal amount must be sized to cover the expected annual draw.
How to evaluate
Confirm the free withdrawal percentage (10% is typical). Confirm whether the free withdrawal resets each year or rolls forward (most reset). For qualified contracts subject to RMDs, confirm that RMDs are treated as part of the free withdrawal or are separately exempt from surrender charges (most modern qualified contracts exempt RMDs).
In the contract
Look for "free withdrawal," "penalty-free withdrawal," "10% withdrawal provision," or "withdrawal benefit." The provision is typically stated as a percentage of contract value with specific timing rules (calendar year vs. contract year).
Related terms
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