Section 7702B: Premium Deductions and Tax-Free Benefits

Long-term care insurance tax treatment turns on a single question: does your policy qualify under Internal Revenue Code Section 7702B? A qualified policy delivers three advantages—benefits paid for care are generally excluded from your taxable income, premiums count toward either the itemized medical expense deduction or the self-employed health insurance deduction up to age-based limits, and employer-paid premiums stay out of your wages. For 2026, indemnity-style benefits are tax-free up to $430 per day, and deductible premium amounts range from $500 to $6,200 per person depending on age.¹

When Benefits You Receive Are Tax-Free

The tax code treats a qualified long-term care contract as accident and health insurance, and treats the benefits as reimbursements for medical care. That framing is what keeps the money you collect out of your gross income when you’re actually receiving care.²

How the exclusion is measured depends on how your policy pays.

Reimbursement Policies

A reimbursement policy pays back what you actually spent on qualified long-term care services, up to the policy’s limits. Because every dollar is tied to a documented expense, the full payment is excluded from income with no separate cap.

Indemnity (Per Diem) Policies

An indemnity policy pays a flat daily or monthly amount once you qualify for benefits, no matter what your care costs. These payments are tax-free up to a statutory per diem limit that adjusts for inflation each year. For 2026 the limit is $430 per day.¹

Payments above $430 per day are not automatically taxable. The exclusion actually covers the greater of the per diem cap or your actual qualified care costs. So a $500 daily payment against $480 of actual costs is entirely tax-free, because the actual spend exceeds the amount above the cap. Only when both the $430 cap and your real costs sit below the payment does the excess become taxable.²

Your insurer reports every benefit payment to you and to the IRS on Form 1099-LTC, noting whether the amount was a reimbursement or a per diem payment.³ If per diem payments exceed $430 per day, keep receipts for your actual care costs so you can show the IRS why the excess isn’t taxable.

Deducting Premiums as a Medical Expense

Premiums for a qualified long-term care policy count as medical expenses on Schedule A. The tax code explicitly folds qualified long-term care insurance into the definition of medical care.⁴ Three separate limits stand between the premium you pay and the tax savings you actually see.

Age-Based Eligible Premium Limits

Only a portion of your premium counts, capped by your age at the end of the tax year. For 2026 the per-person limits are:¹

Age 40 or under: $500
Ages 41 to 50: $930
Ages 51 to 60: $1,860
Ages 61 to 70: $4,960
Ages 71 and older: $6,200

The cap applies to each insured person, so a married couple both over 70 could count up to $12,400 in premiums.

The 7.5% AGI Floor

Whatever premium amount survives the age cap gets pooled with all your other medical expenses, and you only deduct the total that exceeds 7.5% of adjusted gross income.⁵ At $100,000 of AGI, the first $7,500 of medical spending produces no deduction. The premium deduction has real value mostly when you already have significant medical costs pushing past that floor.

The Standard Deduction Barrier

The premium deduction only helps if you itemize. For 2026 the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.⁶ Unless your combined itemized deductions clear that number, the long-term care premium deduction changes nothing on your return. A healthy couple in their 50s paying a few thousand dollars in premiums with moderate other deductions will almost always take the standard deduction and get no benefit from the premium rule.

The Above-the-Line Deduction for the Self-Employed

Self-employed filers get better treatment. If your business has a net profit, you can deduct eligible long-term care premiums as part of the self-employed health insurance deduction on Schedule 1 of Form 1040.⁷ It’s above-the-line, so you claim it whether you itemize or not, and the 7.5% AGI floor doesn’t apply.

The same age-based caps run from $500 to $6,200 per person for 2026.¹ The deduction can’t exceed the business’s net profit. You calculate it on Form 7206 and report it on Schedule 1, line 17. One catch: premiums you deduct here can’t be counted again as itemized medical expenses on Schedule A.⁸

Employer-Paid Premiums

When an employer pays qualified long-term care premiums for an employee, both sides come out ahead. The employer deducts the premium as a compensation expense. The employee doesn’t include the payment in gross income, because the code treats employer-sponsored qualified long-term care coverage as an accident and health plan, extending the standard health-insurance exclusion.²

The exclusion is for rank-and-file employees. More-than-2% S corporation shareholders, sole proprietors, and partners aren’t employees for this purpose. They use the self-employed health insurance deduction instead.

Paying Premiums From an HSA

A Health Savings Account can pay qualified long-term care insurance premiums tax-free and penalty-free. HSA withdrawals for non-medical purposes ordinarily trigger income tax plus a 20% penalty before age 65, but long-term care premiums are an explicit exception.⁹

The same age-based eligible premium limits cap the annual HSA amount for this purpose: $500 at age 40 or under, up to $6,200 at age 71 and older for 2026.¹ This route is especially useful for people who take the standard deduction and can’t reach the itemized medical expense deduction. Pre-tax HSA dollars pay the premium regardless of how you file.

What Makes a Policy Qualified Under 7702B

Every tax break above depends on the policy meeting Section 7702B. The contract has to be guaranteed renewable, so the insurer cannot cancel or refuse renewal while you pay premiums. It cannot build cash value, and you cannot borrow against it or pledge it as collateral. Refunds are only permitted on death or full surrender, and even then cannot exceed premiums paid. Any dividends or refunds during the life of the contract must reduce future premiums or increase future benefits.²

Benefits can only begin once a licensed health care practitioner certifies that you are “chronically ill”—unable to perform at least two of six activities of daily living without substantial help for a period expected to last 90 days, or requiring substantial supervision because of severe cognitive impairment. Care must follow a plan prescribed by a licensed practitioner. Without both the certification and the plan of care, payments don’t get tax-free treatment.²

The contract also has to comply with the consumer protection standards in the NAIC Long-Term Care Insurance Model Act.¹⁰ Before you buy, get written confirmation from the insurer that the policy meets the Section 7702B definition.

Tax-Free 1035 Exchanges Into an LTC Policy

An existing life insurance policy or non-qualified annuity with built-up cash value can be exchanged tax-free into a qualified long-term care contract. Section 1035 treats the swap as a like-kind exchange with no gain recognized.¹¹ Qualified long-term care contracts were added to the list of eligible targets by the Pension Protection Act of 2006.¹²

The transfer must go directly between insurance companies. If the money passes through your hands, the IRS treats it as a taxable distribution followed by a new purchase. Partial 1035 exchanges are also allowed, which lets you fund annual LTC premiums from an existing policy’s cash value over time rather than moving the whole balance at once. That’s useful if you’re sitting on a whole life policy with significant gains and would face a tax hit on surrender. The receiving policy still has to meet the 7702B requirements for the exchange to keep its tax-free status.

Hybrid Life/LTC Policies

Combination policies that pair life insurance with a long-term care rider have become the dominant product in this market. Benefits paid for qualified long-term care services are governed by Section 7702B and are generally tax-free under the same rules as a standalone policy.²

Premiums are the tradeoff. They generally aren’t deductible as medical expenses because the contract provides life insurance protection in addition to long-term care coverage, and the 7702B deduction rules apply only to contracts whose sole insurance protection is qualified long-term care services. A 1035 exchange into a hybrid policy still works: Section 1035 provides that a life insurance contract does not lose its status simply because a qualified long-term care rider is attached.¹¹

If the Policy Isn’t Qualified

Fail Section 7702B and every advantage above disappears. Benefits paid under a non-qualified policy can be taxable income. Premiums no longer count for the medical expense deduction, the self-employed health insurance deduction, or tax-free HSA withdrawals. Employer-paid premiums would likely be treated as taxable wages rather than excludable health coverage. Confirm qualified status in writing before you buy; the tax consequences of getting it wrong are steep.

1
Internal Revenue Service. Rev Proc 2025-32
2
Office of the Law Revision Counsel. 26 USC 7702B – Treatment of Qualified Long-Term Care Insurance
3
Internal Revenue Service. Instructions for Form 1099-LTC
4
Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc, Expenses
5
Internal Revenue Service. Topic No 502 Medical and Dental Expenses
6
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
7
Internal Revenue Service. Instructions for Form 7206
8
Internal Revenue Service. Form 7206 – Self-Employed Health Insurance Deduction
9
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
10
National Association of Insurance Commissioners. Long-Term Care Insurance Model Act
11
Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies
12
Internal Revenue Service. Notice 2011-68 – Annuity Contracts With a Long-Term Care Insurance Feature