In a population, there is a proportion $p$ that I want to know. I sample the population and observe proportion $\hat{p}$. It is very unlikely that $p=\hat{p}$, and what I want to do is say something in terms of probability about $p$ being close to $\hat{p}$. I want a method of creating what is called a "95% confidence interval" around $\hat{p}$ that satisfies the following:
If this is method repeated indefinitely, with probability 1 the proportion of intervals produced that contain $p$ converges to 0.95
Everything I've ever seen tells me that the right way to construct this interval is according to the following formula, $$ \hat{p} \pm 1.96\sqrt\frac{\hat{p}(1-\hat{p})}{n} \qquad (A) $$
My question regards the validity of the $\sqrt\frac{\hat{p}(1-\hat{p})}{n}$ part of this formula. It seems to me that constructing the interval this way does not satisfy the condition written in bold above.
Argument
Suppose $p=0.5$ and $n$ is large enough that we can assume normality without going far wrong. In this case it is true that $\hat{p}$ has a 95% chance of being within the following interval,
$$
0.5 \pm 1.96\sqrt{\frac{0.5(1-0.5)}{n}} \quad = \quad 0.5 \pm \frac{1.96(0.5)}{n}
$$
Let me call this interval $(0.5-Q,0.5+Q)$. The maximum value of $x(1-x)$ occurs at $x=0.5$. This implies that when $\hat{p} = 0.5 + Q$ the interval constructed according to (A) does not contain $p$; the radius of the interval is smaller than Q. The size of the interval about $\hat{p}$ constructed according to (A) varies continuously with $\hat{p}$, so this implies that there is some $\epsilon>0$ such that no $\hat{p}$ in the interval $(0.5 + Q-\epsilon, 0.5 +Q)$ leads to an interval containing $p$, constructed according to (A). Ipso facto, the probability that the interval constructed according to (A) contains $p$ is less than 95%.
In the following picture, there is a 95% chance that $\hat{p}$ will be between the brackets, but those $\hat{p}$ lying in the blue region lead to intervals that do not contain $p$.
When $p$ is larger than 0.5 we can still consider the interval $(p-Q, p+Q)$ in which $\hat{p}$ falls with 95% probability. It is possible that $p-Q$ is further away from $0.5$ than $p$, in which case the situation is essentially the same as when $p=0.5$ and it is not true that the interval produced around $\hat{p}$ will contain $p$ with 95% probability. It is also possible that $p-Q$ is closer to 0.5 than $p$. In this case, utilizing (A) leads to $\hat{p}$ slightly less than $p+Q$ whose intervals don't contain $p$ (pictured in blue below), as well as $\hat{p}$ slightly less than $p-Q$ whose intervals DO contain $p$ (pictured in red below)
In this case the red region is larger than the blue region. I am not able to say for sure, but if was a betting man I would wager that what is gained in the red does not exactly balance what is lost in the blue; i.e. the probability that the interval produced according to (A) contains $p$ is still not 95%.
Alternative
As an alternative, it seems the more responsible thing to do would be to use 0.5 always in the computation of the confidence interval. i.e. $$ \hat{p} \pm 1.96\sqrt{\frac{0.25}{n}} $$ This is gives the biggest possible interval. The above bold condition is still not satisfied, but the following condition is,
If this method is repeated indefinitely, with probability 1 the proportion of intervals produced that contain $p$ converges to at least 0.95
Why is this alternative approach never used? I'm willing to accept that the answer to my question is something along the lines of "It's close enough, especially when $n$ is large. Formula (A) is not strictly correct, but nobody cares. Everything is just approximations anyway." I just want to make sure there is not something I'm missing or some error in my thinking. I've only every seen (A) presented as if it has rigorous mathematical backing.