A qualified long-term care insurance policy is one that meets every requirement of Internal Revenue Code Section 7702B, and meeting that standard unlocks two things: you can count premiums toward your medical expense deduction (up to age-based caps that reach $6,200 per person in 2026 for those over 70), and the benefits the policy pays are generally tax-free. The same rules bring mandatory consumer protections with them. If a policy falls outside 7702B, none of this applies.
What Makes a Policy Qualified
A contract earns tax-qualified status by satisfying every one of the structural rules in Section 7702B. The IRS then treats it as accident and health insurance, which is what opens the door to the tax treatment below.
- Guaranteed renewable. The insurer cannot cancel your coverage because you age or get sicker. Premiums can only change through a rate increase applied to an entire class of policyholders, not to you individually.
- No cash surrender value. The policy cannot build up money you can withdraw, borrow against, or pledge as collateral. This is where most non-qualified policies diverge.
- Refunds reinvested. Premium refunds and policyholder dividends must reduce future premiums or increase future benefits. You cannot take them in cash.
- Long-term care only. The contract’s only insurance protection must be qualified long-term care services, and it cannot duplicate benefits already available under Medicare.
If your policy lets you cash it out or borrow against it, it does not qualify under 7702B, and the tax benefits described below do not apply.1Office of the Law Revision Counsel. 26 USC 7702B – Treatment of Qualified Long-Term Care Insurance
Deducting Your Premiums
Premiums for a qualified policy count as medical expenses under IRC Section 213(d), but the amount you can include is capped by your age at year-end. How you claim it depends on whether you itemize, are self-employed, or get coverage through an employer.
Age-Based Premium Limits for 2026
The IRS adjusts these caps for inflation each year. For 2026, the maximum deductible premium per person is:
- Age 40 or under: $500
- Ages 41 to 50: $930
- Ages 51 to 60: $1,860
- Ages 61 to 70: $4,960
- Age 71 and older: $6,200
The caps apply per person. If you and your spouse each own a qualified policy, each of you gets your own age-based limit.
Itemizers and the 7.5% Floor
If you claim premiums as an itemized deduction on Schedule A, your qualified LTC premiums (up to the age-based cap) join all your other medical costs, and you can only deduct the total that exceeds 7.5% of your adjusted gross income. On $100,000 of AGI, the first $7,500 in medical expenses produces no deduction. That floor is why many itemizers with moderate medical bills see no tax benefit from LTC premiums unless they have a high-cost year.2Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses
Self-Employed Individuals
Self-employed taxpayers get a better result. Under IRC Section 162(l), you can take an above-the-line deduction for health insurance premiums, including qualified LTC premiums up to the age-based limits. Above the line means you subtract it from gross income without itemizing and without the 7.5% floor. This is available to sole proprietors, partners, LLC members, and S-corporation shareholders who own more than 2% of the company.
Employer-Paid Premiums
When an employer pays for an employee’s qualified LTC policy, the employer deducts the cost as a business expense, and the employee excludes the premiums from gross income. The age-based caps that limit individual deductions do not apply to the employer exclusion, and coverage can extend to a spouse and dependents. One restriction: LTC premiums cannot be paid through a pre-tax cafeteria plan or flexible spending arrangement. Congress specifically excluded long-term care insurance from the definition of a qualified benefit under cafeteria plan rules.3Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans
Paying With HSA Funds
You can use Health Savings Account money to pay qualified LTC premiums, and the distribution counts as a tax-free qualified medical expense. The same age-based caps apply, so any withdrawal above your limit for the year is treated as a non-medical distribution. For people who have built up sizable HSA balances, this is one of the most efficient ways to fund coverage, since HSA withdrawals for qualified medical expenses are never taxed.
How Benefits Are Taxed
Benefits from a qualified policy are generally excluded from gross income. How the exclusion works depends on whether the policy reimburses actual expenses or pays a fixed daily amount.
Reimbursement Policies
If the policy pays based on actual care costs, every dollar of reimbursement is tax-free so long as the expense is for qualified long-term care services. There is no daily dollar cap on the exclusion, because you are only receiving money you actually spent.1Office of the Law Revision Counsel. 26 USC 7702B – Treatment of Qualified Long-Term Care Insurance
Per Diem Policies
Per diem (indemnity) policies pay a fixed daily amount regardless of what care costs on a given day. For 2026, the IRS caps the tax-free exclusion at the greater of $430 per day or your actual long-term care expenses. Any per diem payment that exceeds both your actual daily costs and the $430 limit is taxable income. Most policyholders whose daily benefit sits at or below $430 never owe anything extra.
1099-LTC Reporting
Insurance companies report all long-term care benefit payments to you and the IRS on Form 1099-LTC. The form shows whether payments were per diem or reimbursement, which is how the IRS knows whether to check for a taxable excess. If your 1099-LTC shows per diem payments, you report the amounts on Form 8853 and calculate any taxable portion there.4Internal Revenue Service. Instructions for Form 1099-LTC
When Benefits Actually Begin
Owning a qualified policy does not let you file a claim whenever you want. Federal law sets a medical threshold, and a licensed health care practitioner must certify you have crossed it.
The Chronically Ill Standard
You qualify for benefits if a licensed practitioner certifies one of two conditions. The first is functional: you need substantial help from another person with at least two of six Activities of Daily Living, which are eating, toileting, transferring, bathing, dressing, and continence. The inability must be expected to last at least 90 days, which keeps the policy from paying out for short-term recovery from surgery or minor illness.1Office of the Law Revision Counsel. 26 USC 7702B – Treatment of Qualified Long-Term Care Insurance
The second condition is cognitive impairment severe enough that you need substantial supervision to protect your health and safety. Alzheimer’s disease is the common example, but any cognitive loss that requires monitoring to prevent harm satisfies this trigger. Unlike the functional test, cognitive impairment has no minimum ADL count.
Who Certifies and How Often
The certifying practitioner must be a physician, registered nurse, or licensed social worker. Certification must be renewed within every 12-month period for benefits to continue. Annual recertification catches situations where someone recovers enough to no longer meet the threshold, though for conditions like advanced dementia it is largely a formality.
Hybrid Policies and 1035 Exchanges
Standalone LTC policies are not the only option. A growing share of buyers use hybrid contracts that combine life insurance or an annuity with long-term care coverage.
How Hybrids Are Taxed
When LTC coverage rides on a life insurance or annuity contract, IRC Section 7702B(e) treats the LTC portion as a separate contract for tax purposes, so LTC benefits paid under the rider get the same tax-free treatment as a standalone qualified policy. The Pension Protection Act of 2006 clarified this and, starting in 2010, made charges against an annuity’s cash value used to pay for qualified long-term care a non-taxable reduction in your cost basis rather than a taxable distribution.
One limitation: you cannot take a Section 213 deduction for the LTC portion of a hybrid premium if the payment comes from the life contract’s cash surrender value or the annuity’s cash value. Only out-of-pocket premium charges are deductible. Hybrid contracts funded with pre-tax retirement money (IRAs, 401(k)s, 403(b)s) are excluded from these favorable rules entirely.
Tax-Free Exchanges Under Section 1035
If you have an existing policy you no longer need for its original purpose, you can exchange it tax-free for a qualified long-term care contract under IRC Section 1035. The permitted exchanges are life insurance to a qualified LTC contract, an endowment to a qualified LTC contract, an annuity to a qualified LTC contract, and a qualified LTC contract to another qualified LTC contract.
The exchange must be a direct transfer between insurance companies. If you take a distribution and then buy the new policy, the IRS treats it as a taxable event. Partial exchanges are permitted, and some people use them to fund annual LTC premiums from an existing annuity’s cash value. The annuity must have been bought with after-tax dollars; contracts inside retirement accounts do not qualify.5Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies Your cost basis in the old contract carries over to the new one, so no gain is recognized at the time of the exchange.6Internal Revenue Service. Notice 2011-68 – Annuity and Life Insurance Contracts With a Long-Term Care Insurance Feature
Medicaid Partnership Protection
A qualified policy can also connect to your state’s Medicaid Long-Term Care Partnership Program. Under the Deficit Reduction Act of 2005, states can operate partnership programs that let policyholders shield assets from Medicaid’s spend-down rules on a dollar-for-dollar basis.7Centers for Medicare and Medicaid Services. Long-Term Care Partnerships Background
If your qualified policy pays out $200,000 in benefits before being exhausted, you can keep $200,000 in assets that would otherwise have to be spent down before Medicaid picks up your care. The protected amount is on top of what Medicaid already exempts, like your home in most cases. The protection also extends to estate recovery, so the state cannot recoup those dollars from your estate after death.
To count as a partnership policy, the contract must meet the standard 7702B requirements, be certified by the state insurance commissioner as meeting specific NAIC model act provisions, include inflation protection, and have been issued after the state’s partnership program took effect. Most states now run partnership programs, but the rules and inflation-protection specifics vary. A policy bought before your state launched its program likely will not qualify.
Consumer Protections Built Into the Policy
Qualified policies must include several consumer protections drawn from the NAIC model acts. These rules exist because LTC coverage is typically bought decades before it is used.
Inflation Protection Must Be Offered
Every insurer must offer inflation protection at purchase. Without it, a policy bought at 55 with a $200 daily benefit could be worth far less in real terms by the time you need care at 80. The offer must be clearly presented, and if you decline it, your rejection must be documented in writing. The type of protection varies (compound growth, simple growth, periodic increase options), but the insurer cannot skip the offer.
No Prior Hospitalization Requirement
A qualified policy cannot require you to spend time in a hospital before benefits begin. Older products routinely required a three-day hospital stay, which blocked people whose decline was gradual rather than triggered by an acute event. The federal prohibition ensures you can access benefits based on functional status alone.
Nonforfeiture Benefits
If you stop paying premiums after holding the policy for several years, nonforfeiture provisions keep you from losing everything. The insurer must offer a nonforfeiture option, typically a shortened benefit period that provides reduced coverage based on premiums already paid.
A separate safeguard called contingent nonforfeiture applies when premium increases become substantial. If cumulative increases cross thresholds tied to your age at issue and you let the policy lapse within 120 days, you automatically receive a paid-up benefit. The thresholds are higher for younger buyers and much lower for older ones, reflecting that rate increases on in-force LTC policies have been a persistent industry problem and that policyholders who paid premiums for years should not walk away empty-handed when rates outrun affordability.8National Association of Insurance Commissioners. Long-Term Care Insurance Model Regulation