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Since this annuity is a non-qualified annuity it was purchased with post tax dollars. There is no 10% tax penalty and your age has nothing to do with anything on a non-qualified annuity. Any penalty is because of the annuity contract itself and has nothing to do with the tax code.
The basis in the annuity is equal to the initial investment of $21,000. If the Cash surrender value is $20,194.82 then that is the amount that you should be able to withdrawal under the contract to surrender the annuity policy The reason the cash surrender value is less than the amount placed in the policy is because there is a surrender charge that is being charged by the annuity company. This is based on the contract requirements to keep the money in the annuity for so long. The "penalty free amount" is the amount you can withdrawal and not pay a contract surrender charge.
Since the basis is $21,000 you will have to pay income tax on the annuity for all amounts that you withdrawal over $21,000. An annuity is taxed different than stock or other investments so it is ordinary income tax that is applied for all income that is distributed from the trust. The amount of income that is taxable if you withdrawal $20,194 is $ since the basis is $21,000 ($21,000-$20,194).
I cannot provide you with legal advise. I can provide you with information about the law related to your question. My answer, and any information that you can find online, should not take the place of having a detailed consultation with a lawyer in your area to advise you regarding your specific issues.
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