Hybrid Long-Term Care Insurance Tax: 1035, Per Diem, 2026 Limits

The 2026 numbers, read from the page

Two IRS numbers decide most of the tax on long-term care coverage: how much premium you can count, and how much benefit you can receive tax-free on a per diem basis. Both are set in the annual inflation revenue procedure. Rev. Proc. 2025-32 states its figures “as in effect on October 9, 2025”, and it is the one that applies to taxable years beginning in 2026 (section 5.02).

Source: Rev. Proc. 2025-32, sections 4.27 and 4.62 (2026), the table read from the rendered page 22 of the PDF; IRS Publication 502 (2025) and the Instructions for Form 8853 (2025) for 2025; 26 U.S. Code Sections 213(d)(10) and 7702B(d)(4) for the statute base; read on October 21, 2026. The change column is our arithmetic.

A note on how we read the table. The text layer of the Rev. Proc. 2025-32 PDF drops the $1,860 into the wrong row, so a copy-and-paste or a scraper shows a blank next to “51 to 60”. The page image shows five rows, each with its own figure, and they match the 2026 figures in the data file. Section 3.27 is how some summaries cite it; in the PDF it is section 4.27 (the 2026 items are section 4; section 3 only modifies 2025 items).

The statute fixes the base amounts and the Treasury indexes them. Section 213(d)(10)(B) raises each dollar amount by the medical care cost adjustment and rounds the increase to a multiple of $10; Section 7702B(d)(5) says the $175 per diem base is “increased at the same time and in the same manner” as the premium limits. That is why both numbers move together every year, and why a 2027 revenue procedure is the document to watch.

Why most hybrid policies have no premium deduction

Tax law has no category called “hybrid”. It sees a life insurance contract or an annuity, and, if there is a long-term care feature, a qualified long-term care insurance contract that is “part of or a rider on” it. Section 7702B(e)(1) says that for tax purposes the portion providing the coverage “is a separate contract”, and Section 7702B(e)(3) defines the portion as only the terms and benefits in addition to those of the contract without the coverage. Section 7702B(e)(4)(B)(v) excludes an annuity held inside an individual retirement account or annuity from this treatment.

Then comes the rule that matters for the deduction. Section 7702B(e)(2) reads: “No deduction shall be allowed under section 213(a) for any payment made for coverage under a qualified long-term care insurance contract if such payment is made as a charge against the cash surrender value of a life insurance contract or the cash value of an annuity contract.” The other side of the same coin is Section 72(e)(11): for a charge against the cash value of an annuity (or the cash surrender value of a life insurance contract) paid as coverage under a qualified long-term care contract that is part of or a rider on it, “the investment in the contract shall be reduced (but not below zero) by such charge” and “such charge shall not be includible in gross income.”

Source: 26 U.S. Code Sections 7702B(a), (b), (d), (e), 72(e)(11), 101(g) and 213(d) (Cornell LII); IRS Notice 2011-68 sections 3.02 and 3.08; Form 1099-LTC instructions (Rev. April 2025); read on October 21, 2026. The comparison is our reading.

What the statute does not say matters too. Section 7702B(e)(2) reaches a payment “made as a charge against” the cash value. We found no IRS text on a rider whose premium is billed separately and not taken from cash value; whether that premium is an eligible premium is a question for the person who prepares the return. Notice 2011-68 also does not say whether an amount moved into a long-term care contract by a Section 1035 exchange is a “premium paid” for Section 213; it deals with basis, not the deduction.

Notice 2011-68 gives the IRS's view of how the charges and the cost basis interact. When premiums are credited to the cash value of an annuity and the coverage is paid by charges against it, the Treasury and the IRS believe that “all premiums paid for a combination contract that is an annuity and also provides long-term care insurance are generally included in investment in the contract”.

When any deduction exists: the age and AGI table

The deduction is not the premium. It is the amount by which all your medical expenses, including eligible premiums, exceed 7.5 percent of AGI (Section 213(a)). So the question is whether the premium limit is bigger than the floor, and the floor grows with income. The table finds the highest AGI at which any premium is counted, assuming no other medical expense.

Source: Rev. Proc. 2025-32 section 4.27 and 26 U.S. Code Section 213(a), read on October 21, 2026. The AGI figures are our arithmetic: the limit divided by 0.075, rounded to the dollar, with no other medical expense.

Here is the amount that would count above the floor at six levels of AGI, which is the figure that would be added to your other medical expenses; it is not the tax saved.

Source: Rev. Proc. 2025-32 section 4.27 and 26 U.S. Code Section 213(a), read on October 21, 2026. Every cell is our arithmetic: the larger of zero and the limit less 7.5% of AGI, with no other medical expense. Premiums for two people aged 60 or under never exceed $3,720, which is below the floor at every AGI in the table.

The edge case is a high earner. A married couple, both 65, with $300,000 of AGI has a floor of $22,500 (our arithmetic). Their eligible premiums are capped at $4,960 each, $9,920 together, so the premiums alone add nothing to a deduction, however much they pay. Other medical costs change the answer, because they share the floor: with $20,000 of other unreimbursed medical expense, the same couple's $9,920 would bring the total to $29,920, $7,420 above the floor (our arithmetic). Even then the deduction is itemized, and for 2026 it competes with the $32,200 standard deduction for joint filers, or $16,100 for an unmarried filer (Rev. Proc. 2025-32 section 4.14), plus $1,650 per aged spouse (or $2,050 for an unmarried aged filer).

Two other routes are not subject to the 7.5 percent floor, and both use the same age limits.

• Self-employed. Section 162(l)(1) allows an above-the-line deduction for insurance that constitutes medical care for a taxpayer who is an employee within the meaning of Section 401(c)(1). Section 162(l)(2)(C) says that for a qualified long-term care contract “only eligible long-term care premiums (as defined in section 213(d)(10)) shall be taken into account”. It is not allowed for any month in which the taxpayer is eligible to participate in a subsidized plan of an employer of the taxpayer or the spouse (Section 162(l)(2)(B), applied separately to long-term care plans), and it cannot exceed earned income from the business.
• Health savings account. Section 223(d)(2)(B) bars paying insurance premiums from an HSA, with exceptions in Section 223(d)(2)(C), one of them for “a qualified long-term care insurance contract (as defined in section 7702B(b))”. Our reading is that the Section 213(d)(10) age limit also applies there, because medical care in Section 213(d)(1) takes only “eligible long-term care premiums” into account; we found no IRS text in our saved documents that states the HSA limit.

Per diem or reimbursement: how benefits are taxed

The benefit side is where a hybrid and a traditional policy look alike. A benefit from a qualified contract is treated as reimbursement for medical care (Section 7702B(a)(2)). The only cap applies to periodic payments “made without regard to the extent of the costs incurred” (Section 7702B(d)(6)). Form 1099-LTC tells you which you have: “Per diem basis” means payments made on any periodic basis without regard to actual expenses, and “reimbursed basis” means payments made for actual expenses incurred (box 3).

The limit has three parts. Section 7702B(d)(1) adds up the periodic payments received for a period under all qualified long-term care contracts for the same insured, plus periodic accelerated death benefits treated under Section 101(g) as paid by reason of death. If that total exceeds the per diem limitation, the excess “shall be includible in gross income without regard to section 72.” Section 7702B(d)(2) sets the limitation as the greater of the dollar amount ($430 for 2026) or the costs actually incurred for qualified services, minus reimbursements received. And all persons receiving periodic payments for the same insured are treated as one person (Section 7702B(d)(3)).

Source: 26 U.S. Code Section 7702B(a), (d) and Rev. Proc. 2025-32 section 4.62, read on October 21, 2026. The amounts are our arithmetic on invented numbers over a full year of 365 days, assuming no other reimbursements and no other policy. The IRS Form 8853 instructions work an example of the same kind for 2025 at $420 a day ($153,300 for 365 days).

Two points that readers miss. First, the example that feels safe is not: a policy that pays a flat $20,000 a month is a per diem policy and the excess is taxed as ordinary income, with no exclusion ratio. Second, the cap is per insured, per period, across all contracts, including a life insurance policy's chronic-illness acceleration. Form 8853, Section C, is where the taxable amount is figured. The 2025 instructions say that accelerated death benefits for a chronically ill insured “are generally excludable from your gross income to the same extent as they would be under a qualified LTC insurance contract.” Accelerated death benefits paid to a terminally ill insured, certified by a physician as expected to die within 24 months, are not counted in the aggregate (Section 7702B(d)(1), last sentence, and Section 101(g)(4)(A)).

A benefit also requires the insured to be chronically ill: unable to perform at least 2 of 6 activities of daily living (eating, toileting, transferring, bathing, dressing, continence) for at least 90 days, or severely cognitively impaired, certified by a licensed health care practitioner within the preceding 12 months (Section 7702B(c)(2)).

A 1035 exchange into long-term care coverage

Section 1035(a), as the Pension Protection Act of 2006 amended it, has four pairs that matter here.

Source: 26 U.S. Code Section 1035(a) and (b) (Cornell LII), read on October 21, 2026. The fourth row paraphrases the last sentences of 1035(b)(2) and (b)(3).

The consequences, from Notice 2011-68 (the IRS's interim guidance, which says it “may be relied upon to the same extent as a revenue ruling or revenue procedure”):

• The direction is one-way. A qualified long-term care contract can only be exchanged for another one; Section 1035(a)(4) has no path back to an annuity or a life contract. A qualified contract has no cash surrender value to move (Section 7702B(b)(1)(D)). The general direction rules are in our 1035 exchange guide.
• Basis carries over. Under Section 1031(d), applied through Section 1035(d)(2), the adjusted basis of a qualified long-term care contract received “generally carries over from the life insurance, endowment, annuity, or qualified long-term care insurance contract exchanged.”
• A partial exchange of a deferred annuity can qualify. The Notice says a direct transfer of a portion of the cash surrender value of an existing deferred annuity contract for a qualified long-term care contract may be treated as a tax-free exchange, provided Section 1035 is met, and refers to Rev. Proc. 2011-38 for the conditions. A check received and endorsed to the second company is treated as a distribution (Rev. Rul. 2007-24, as the Notice describes it). How basis is split between a long-term care contract and what remains of an immediate annuity is a question the Notice leaves open.
• The dates. The amendments on tax-free exchanges apply to exchanges occurring after December 31, 2009; the Section 72(e)(11) change applies to taxable years beginning after that date.

Source: 26 U.S. Code Sections 1035, 72(e)(11) and 7702B(e)(2); IRS Notice 2011-68 section 3.06, read on October 21, 2026. Amounts are invented; the arithmetic is ours, and it ignores surrender charges, fees and state tax.

The numbers show what Section 72(e)(11) does and does not do. The charge comes out of basis first, so the $100,000 of gain survives and is taxed later when withdrawn income-first (Section 72(e)(2)). The charge was never taxed, which is the advantage the statute gives; the cost is that the dollars used for coverage no longer earn the contract's growth.

If Medicaid planning is in the picture

A reader who already follows the 60-month look-back and the home equity limits on our Medicaid asset protection trust page (see also life estate deeds, basis and Medicaid) should know that the federal Medicaid statute has a separate, state-by-state link to long-term care insurance. Under 42 U.S.C. 1396p(b)(1)(C)(iii), a “qualified State long-term care insurance partnership” disregards assets equal to the insurance benefits paid, but only if the policy is “a qualified long-term care insurance policy (as defined in section 7702B(b) of the Internal Revenue Code of 1986) issued not earlier than the effective date of the State plan amendment”, covers an insured who was a resident of that State when coverage first became effective, and meets the inflation rule: compound annual protection if the buyer is under age 61, “some level” from 61 through 75, optional from 76. For a policy exchanged for another, residency is tested on the first policy.

Two consequences follow, both from the text. A policy only qualifies if it meets Section 7702B(b), which is the same test that decides the tax treatment above. And whether any given policy is a partnership policy depends on your State's plan amendment, which we did not read for every State; ask the insurer and the State Medicaid agency in writing before relying on it.

What changed in 2026, and what did not

The 2026 changes are the inflation adjustments in Rev. Proc. 2025-32: each premium limit rose between $20 and $180, from 3.0 to 4.2 percent, and the per diem rose $10, 2.4 percent (our arithmetic from the table above). The 7.5 percent floor has been the rate since the 2020 amendment (Pub. L. 116-260). The amendment notes on the Cornell LII pages for Sections 213, 7702B, 72, 101 and 1035 list no change by Pub. L. 119-21, the 2025 law, while the notes on Section 223 list one (section 71306(b)). We found no 2027 long-term care revenue procedure as of October 21, 2026.

What a reader can do with this

• Look up your age on the table, per person. The limit is per person (IRS Publication 502), by age at the end of the year, not at the purchase date.
• Test the floor before counting a deduction. Divide the limit by 0.075 to see the highest AGI at which a premium counts, then add your other unreimbursed medical costs, then compare to the standard deduction.
• Ask how the premium is paid. A charge against cash value gets no deduction (Section 7702B(e)(2)); a stand-alone contract can. A separately billed rider premium is a question for your preparer.
• Check if you are self-employed or have an HSA. Both routes avoid the 7.5 percent floor.
• Read the benefit trigger and the benefit type. Per diem and indemnity benefits are capped at $430 a day in 2026 (or actual costs, if higher); reimbursement benefits pay documented costs. Ask the insurer which one the contract uses, and what the 1099-LTC will show in box 3.
• Keep the cost records. If benefits can exceed $430 a day, actual qualified costs raise the limit (Section 7702B(d)(2)); you will need the records and a plan of care prescribed by a licensed health care practitioner.
• Before a 1035 exchange, ask for the exchange to be a direct transfer, in writing. Ask whether the receiving contract is a qualified long-term care contract, what happens to basis, and in a partial exchange what the 180-day and distribution conditions of Rev. Proc. 2011-38 mean for the old contract (our 1035 guide covers them).
• If Medicaid is a possibility, ask whether the policy is a partnership policy in your State.

FAQ

Sources, read and saved on October 21, 2026: Rev. Proc. 2025-32 (IRS), with the section 4.27 table read from the rendered PDF page; IRS Notice 2011-68; IRS Publication 502 (2025); Instructions for Form 8853 (2025); Instructions for Form 1099-LTC (Rev. April 2025); 26 U.S. Code Sections 72, 101, 162, 213, 223, 1035 and 7702B (Cornell Legal Information Institute); 42 U.S.C. 1396p (LII). Break-even AGI, the grid, the per diem illustrations and the exchange examples are our arithmetic on invented numbers. This is analysis of public documents, not investment, legal or tax advice.