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Confinement Care Riders 101

hands-981400_640According to a recent article by annuity guru Stan Haithcock, deferred annuities with attached confinement care riders are the “most recent overhyped benefit touted by agents.” Although Haithcock does add that they do have a place in many portfolios, but as usual, only if they are fully understood. So what is a confinement care rider and what does it do? Here’s a look at that, and also some ideas on what they DON’T do too.

Income riders can be added to some deferred variable and indexed annuities, providing income guarantees to start at a future date of your choice.  Nowadays, some riders also offer an additional sum above the income guarantee if you fall ill. Each policy is different, but most of them qualify you for this enhanced payment when your ability to perform the six “Activities of Daily Living,” is compromised. These activities include eating, bathing, dressing, toileting, transferring (walking) and continence. With most contracts, once you cannot complete two of the six activities, then you qualify for the enhanced income payout.  Most confinement care riders are guarantee the increased income while you are sick for a five year period. After that time period, the income goes back to its original level.

With any annuity contract, your guaranteed income stream is a combination of return of principal and interest. In return for transferring the risk to the annuity company, you start taking money from the insurer’s pocket, but only after your account is drawn down to zero. With a confinement care rider, you can accomplish this quicker, because the increased payment is being taken from your annuity value.  To quote the article, “get your money back quicker when you get sicker.”

It’s crucial to understand that confinement care riders are NOT Long Term Care (LTC) coverage. Traditional LTC products are under the health care category as opposed to the life insurance category. And while a confinement care rider will require a doctor’s verification (at some point), LTC products require you to go through underwriting processes, including blood tests, medical records, etc, for approval. There are also tax benefits with LTC products that you won’t find with confinement care riders. You might hear an annuity agent refer to these annuity products as “Long Term Care Doublers,” but don’t be confused. These riders are not to be confused with Long Term Care coverage.

While Haithcock warns that confinement care riders should only be used as supplemental coverage, there are, of course, some situations when they might be the best bet. Insurers are said to love to insure healthy people, making the purchase of an LTC policy fairly simple. But for those who already have health issues, confinement care riders may be your only choice. “Guaranteed issue” products aren’t going to provide the coverage that you’d get with a product that requires underwriting, but when it’s the only option, it’s not a horrible one.  Still, Haithcock is very clear in his opinion on the agent who tries to convince you to replace your LTC with a confinement rider, calling it “criminal.” If you can qualify for traditional LTC, he believes it is worth the increased premiums because the coverage is so much better.

Confinement care riders can provide great supplemental coverage that are worth looking at if you are shopping around for income rider guarantees. But as always, be sure to do your homework first, and ask your trusted financial advisor for multiple policies to review. And don’t forget, “believe the policy, not the pitch.”

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