It's not just the chairman of the Federal Reserve Board who needs to worry about inflation. If you're buying a long-term care (LTC) insurance policy, you may want to think about purchasing an inflation rider. That's because your policy isn't going to be worth as much in the future as it is today. A nursing home that costs around $70,000 per year in 2008 could cost more than $100,000 in the near future.

"It's important that consumers at least have a discussion [with their agent] about inflation," says Beth Ludden, senior vice president for product development at Genworth Financial.

Without protection against inflation, an LTC policy could prove to be inadequate for your needs. But inflation riders add significantly to the cost of long-term care insurance. It could double your premium. On the other hand, inflation riders can protect you from being underinsured later. With an inflation rider, your daily benefit increases by a fixed percentage each year for a specified period. The lifetime maximum also increases proportionately.

A simple or compound choice

When you buy inflation protection in a long-term care policy, you can choose between a "simple" or a "compound" rider. The adjustment with a simple inflation rider is a fixed percentage of your original daily benefit. The compound inflation rider increases coverage more rapidly than the simple version.

Typically, an inflation rider on a long-term care policy will increase the amount of coverage by 5 percent each year (some companies offer 3 percent to keep prices down). For example, if you choose a simple inflation rider for 5 percent with a $100 per day benefit, coverage will expand to $105 at the policy's first anniversary date. Your daily benefit will increase by $5 each year for the life of the policy.

With a compound inflation rider, you'll gain more coverage each year. Instead of rising 5 percent based on the original daily benefit of $100, it will be based on the higher amount of coverage at each anniversary date of the policy. (After the benefit is increased to $105, the next increase will be 5 percent of $105 and so forth.) In 2008, the average consumer purchased a $150 per day benefit — give or take a few depending on place of residence, Ludden says.

A good time to seriously consider purchasing an inflation rider is when you reach your 50s. Choosing between a simple and compound inflation rider depends on a number of variables, including your age and health.

"If you are a diabetic [with serious complications] in your 50s, a compound rider would not be good," says Kim Purnell, a long-term care specialist from Palm Bay, Florida, and a regional sales vice president for MetLife. "That person's health will deteriorate [faster than average] and chances are that they will not be around in 30 years."

Ludden adds that if you're older than 60, a simple inflation rider could be adequate. But she warns that waiting until your 60s to purchase a rider could make you uninsurable – depending on your health. If you're younger, a compound rider may be more beneficial. Also, purchasing either inflation rider at a younger age means you will pay less (accumulatively) for your premium, she adds.

Paying for inflation protection

When you buy long-term care insurance, your premium is based upon your age when the policy is issued. The younger you are, the cheaper the premium. Buying the inflation rider allows you to pay the same premium for a larger benefit each year. But adding an inflation rider to your long-term care policy isn't cheap, since you're paying now for additional coverage down the road. A compound rider benefit can double your premium.

"If your base is $1,000 a year and you purchase the compound inflation benefit, that extra rider could increase your premium to $2,000 or even more," Purnell says.

A simple rider is roughly 24 percent cheaper than a compound (or 76 percent more on your premium), adds Ludden.

There's a third option. Purnell suggests a guaranteed-purchase rider as another way to keep up with inflation. With this rider, you're allowed to purchase increased benefits at a later date, even if your health deteriorates. Essentially, it protects your ability to buy more coverage. Often, you will pay a nominal charge for this rider. But the down side is that your premium will increase significantly and will be based upon your age at the time you purchase the additional coverage.

Purnell says that there is another way to guard against inflation without purchasing an inflation rider. He warns that inflation riders may vary from company to company. Some companies base the inflation adjustment on what remains in the account after a claim has been filed. Therefore, Purnell suggests it might be more cost effective to buy a higher daily benefit initially in order offset the impact of inflation. Instead of the daily benefit increasing gradually as it does with an inflation rider, you can increase your coverage by a large amount, such as going from $100 to $140 per day or from $150 to $200.

"My alternative has always been this," Purnell says. "If it costs you 100 percent more [for an inflation rider], would it not be better to buy a $200 per day policy today with no inflation?"

However, even this has a catch. "There is no crystal ball. We don't know how much the cost of care will be in the future," he adds.