I'd guess that about 90% of students have some kind of crushy feelings about their instructor at some point. It's almost inevitable--here you are, in the arms of a (usually) attractive person who is extremely nice to you and totally focused on you. It's only human to respond to that situation.
His flirting and hugging may be natural to him (dancers get used to physical contact and are often more touchy-feely than non-dancers), it may be a way to add a little spice to the lesson without meaning anything further, or it may be a deliberate ploy to get you "hooked" on him and willing to buy more lessons.
But whichever it is, remember that, while he is your only dance instructor, you are one of many students and he probably behaves the same way to all of them. It is far less personal to him than it is to you.
Many studios have non-fraternization policies, so the likelihood of any relationship developing outside the lessons is just about zero. (Ironically, that policy makes it more likely that teachers will flirt because they have any easy out if someone responds by asking them out.)
My advice is to realize that it's just a crush based on the circumstances, that it's not going to go anywhere, and enjoy the warm feelings you have without needing to act on them. If his flirting makes you uncomfortable or fans the flames of your crush too much, ask him to tone it down. or if necessary, switch to a different teacher.