Deferred annuities with attached confinement care riders are the most recent overhyped benefit touted by agents, but they do have a place if fully understood for what they will and will not do.
What is a confinement care rider?
Some deferred variable and indexed annuities offer income riders that can be attached to a policy at the time of application to provide income guarantees starting a future date of your choice. A new trend in the annuity industry is for those income riders to also provide an additional income amount above the income guarantee if you become ill.
Each policy will have their specific rules on when you qualify for this enhanced payment, but most revolve around the ability to perform the six "Activities of Daily Living." Those are eating, bathing, dressing, toileting, transferring (walking) and continence. With most contracts, when you cannot do two of those six verified by your doctor, then you qualify for that enhanced income payout.
Most confinement care riders guarantee that increased income stream while you are sick for a five-year time period. After the five years, the income goes back to its original level. The reason most enhanced payments only last five years, is that studies show when you can't do two of the six activities, you live an average of three years and a maximum of seven. Annuity and life insurance companies have the big buildings for a reason, right! They know when we are going to die, even when we get sick.
Get your money back quicker when you get sicker
All annuity guaranteed income streams, regardless of the type of annuity, are a combination of return of principal and interest. You are transferring the risk to the annuity company, and your goal should be to draw the account down to zero so you can start taking money from the carrier's pocket. That's the true benefit of transferring risk.
With confinement care riders, you are getting your own money back quicker because you have proven to the carrier that you are sick. It's that simple, and you are drawing down your account value faster because the increased payment is subtracting from your annuity value.
Not Long Term Care coverage
Confinement care riders are NOT Long Term Care coverage. The traditional LTC product is under the health care category, not the life insurance category. Traditional LTC requires you to go through the underwriting process (blood tests, medical records, etc.) for approval, and this product also can provide tax benefits as well.
It's easy, lazy, uninformed, and misleading for an agent to suggest that confinement care rider coverage is long-term care. It is not! Annuity agents love to refer to these riders as "Long Term Care Doublers." With some confinement care riders, the income stream doubles if you qualify. However, using the LTC heading is fraudulent.
Guaranteed to be issued
The glaring positive with confinement care riders is that if you can "fog a mirror," you qualify. If you are breathing, you will get the policy. If you are drinking a bottle of scotch and smoking a carton of cigarettes every day but are still healthy, even then, you can own a confinement care rider.
I'm joking to make a point that insurance companies love to insure healthy people. For others not so fortunate, and that have health issues, confinement care riders are your only choice.
It's important to point out that anytime a product is "guaranteed issue" means that the coverage isn't as good as if you purchased a product that requires underwriting. However, beggars can't be choosers.
Supplemental Coverage only
In a perfect annuity world, and unless you are that scotch drinking chain smoker, confinement care riders should only be used as supplemental coverage. Never, and I repeat never, allow an agent to convince you to replace your traditional Long Term Care with a confinement rider. That is criminal in my opinion, and there is no justification for that recommendation.
It is worth paying the increasing premiums for traditional LTC because the coverage is so much better than with confinement care riders. Make the agent show you a side-by-side comparison of the contractually guaranteed coverage along with the tax consequences. Not only will it be educational for your agent, it will factually prove why you need to keep what you have.
It's not too good to be true
With any annuity sales pitch, if it sounds too good to be true, it is every single time. Annuities are not investments; they are contractual transfer of risk strategies. You are buying a contract from the annuity company, and your decision should be based solely on those contractual guarantees.
Confinement care riders can be a good addition for supplemental coverage. If you are shopping income rider guarantees for future income needs, it might make sense to have the agent show you riders that offer confinement care benefits as well. Do your homework, ask the agent for specimen policies to review, and shop all carriers because riders are a commodity product. And always remember to believe the policy, not the pitch.