What Is Section 7702b for Long-Term Care Insurance?
Learn how Section 7702b of the tax code provides the framework for qualified long-term care insurance, defining its structure and tax advantages.
Section 7702b of the Internal Revenue Code establishes the federal standards for long-term care (LTC) insurance policies to receive favorable tax treatment. When a policy meets these requirements, it is considered a “qualified” contract. This designation allows the premiums paid to potentially be tax-deductible and the benefits received to be excluded from taxable income.
The rules under Section 7702b define the features a policy must have and the conditions for accessing benefits. Understanding this section is helpful for planning future long-term care needs, as it directly impacts the financial efficiency of an insurance product.
Defining a Qualified Long-Term Care Insurance Contract
To be “qualified” under Section 7702b, a long-term care insurance policy must meet criteria established by the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The contract must be guaranteed renewable, meaning the insurance company cannot cancel the policy if premiums are paid on time. The insurer does, however, retain the right to increase premiums for an entire class of policyholders.
The contract must state its intent to be a qualified long-term care insurance policy. It must provide coverage only for qualified long-term care services and cannot offer a cash surrender value or be used as collateral for a loan. Any dividends or premium refunds must be used to either reduce future premiums or increase future benefits.
Qualified contracts must incorporate consumer protection provisions from the National Association of Insurance Commissioners (NAIC). These protections address issues such as unintentional lapse, disclosure, and suitability to ensure the policy is appropriate for the buyer.
Tax Treatment of Premiums and Benefits
The tax treatment of a qualified long-term care insurance contract offers distinct advantages for both the premiums paid and the benefits received.
Premiums
Premiums paid for a qualified LTC insurance policy are treated as medical expenses for tax purposes. For an individual who itemizes deductions, these premiums can be included with other medical expenses, and the total amount is deductible to the extent it exceeds 7.5% of their adjusted gross income (AGI). The amount of the LTC premium that can be treated as a medical expense is capped based on the policyholder’s age.
For the 2025 tax year, the deductible limits for premiums are as follows:
- Age 40 or under: $480
- Age 41 to 50: $900
- Age 51 to 60: $1,800
- Age 61 to 70: $4,810
- Age 71 and over: $6,020
Self-employed individuals can generally deduct 100% of the eligible premium up to these age-based limits without being subject to the 7.5% AGI threshold. For C-corporations, premiums paid on behalf of employees are typically fully deductible as a business expense without being limited by the age-based caps.
Benefits
Benefits received from a qualified long-term care policy are generally not included in taxable income. Under a reimbursement model, the policy pays for or reimburses the actual costs of care incurred, and these payments are tax-free up to the amount of those expenses.
Under a per diem or indemnity model, the policy pays a fixed daily or monthly amount, regardless of the actual costs incurred. For these types of policies, the benefits are tax-free up to a specific daily limit set by the IRS, which is indexed for inflation. For 2025, this limit is $420 per day. If the daily benefit paid by the policy exceeds this amount, the excess could be considered taxable income unless the policyholder can show that their actual care expenses were equal to or greater than the total benefit received.
Triggering Tax-Free Benefits
To receive tax-free benefits from a qualified policy, the insured must be certified as “chronically ill” by a licensed health care practitioner within the preceding 12 months. This certification confirms the individual meets one of the law’s qualifying triggers.
One trigger is the inability to perform at least two of six Activities of Daily Living (ADLs) without substantial assistance for at least 90 days. The six ADLs are:
- Eating
- Bathing
- Dressing
- Toileting
- Transferring (moving in and out of a bed or chair)
- Continence
The second trigger is a severe cognitive impairment, such as Alzheimer’s disease, that requires substantial supervision to protect the individual’s health and safety. A person can qualify based on this trigger even if they are physically capable of performing all ADLs.
A requirement for benefit payments to begin is the establishment of a “plan of care.” This plan must be prescribed by a licensed health care practitioner and outlines the specific services the individual needs.
Interaction with Hybrid Life Insurance Policies
Section 7702b rules also apply to hybrid products that pair life insurance with a long-term care rider. These policies offer a pool of money that can be used for care if needed or passed on as a death benefit.
The main feature of a hybrid policy is the acceleration of the death benefit. If the policyholder becomes chronically ill, they can access a portion of their death benefit while alive to pay for care. These accelerated payments receive the same tax-free treatment as benefits from a traditional LTC policy, subject to the same per diem limits.
When long-term care benefits are paid from a hybrid policy, the life insurance death benefit is reduced. For example, if a policy with a $500,000 death benefit pays out $150,000 for long-term care, the remaining death benefit for beneficiaries would be $350,000. This remaining amount is still received by the beneficiaries free of income tax.