Ballroom dancing is not sexual, it is intimate, and there is a huge difference. Most women seem to get it but men have a harder time. To answer your question, "where is this going?" It is going to make your wife a better dancer, that's all. Close or open contact position doesn't matter. All the good dancers dance in close hold. I find it ver difficult to dance any other way. My husband dances and he always dances in close position with every women he dances with. It is the way it is done. Club dancing is very sexual and often inappropriate. If a man or women dances ballroom in a sexual manner they are shunned.
So your wife's instructor is young and good-looking, most of them are so get use to it. I have a competitive partner, that is younger than me. Every body part we have has touched at some point and neither of us think anything of it. In dancing, they are just parts.
Dance with your wife, become the best dancer you can be and you will reap the rewards. Also, my husband has women lining up to dance with him. Sometimes I have to beat them off with a stick. He finds it very flattering but it ends at the end of the song and he goes home with me.