Types of Health Policies — practice questions

11% of the exam ≈17 real questions 22 free questions here

Disability income, medical expense plans, HMOs and PPOs, Medicare supplements, long-term care, and specified-disease policies — the single biggest general-knowledge domain at about 17 scored questions.

Where people lose points

• Business overhead expense pays the business rent and salaries — never the owner’s own income.
• An HMO uses a gatekeeper and in-network care only; a PPO pays out of network at a lower level.
• An HSA requires a qualifying high-deductible health plan; an FSA does not and is use-it-or-lose-it.
• Medicare supplements fill gaps in Original Medicare; Medicare Advantage replaces it.

Questions and answers, explained

All 10 questions above, with the correct answer and why it is correct. Everything here is on types of health policies.

1. Under a key employee disability income policy, which party receives the policy benefits when the key employee becomes disabled?

   • AThe business that employs the key personCorrect
   • BThe key employee
   • CThe key employee's spouse or estate
   • DThe benefits are split equally between the business and the employee

   Why: In key employee (key person) disability insurance, the business is the applicant, premium payer, and beneficiary, while the key employee is the insured. Benefits reimburse the business for lost revenue and the cost of finding and training a replacement. The employee receives nothing directly under this policy — that is what makes choice B the classic misconception. (Outline V.A)

   Reference Outline V.A (Key employee)

2. An insured with a $100,000 AD&D policy loses the sight in one eye in a covered accident. What will the policy most likely pay?

   • AThe full $100,000 principal sum stated on the policy’s schedule page
   • BA capital sum equal to a stated percentage of the principal sumCorrect
   • CNothing — an AD&D policy pays only for accidental death
   • DA monthly disability income benefit while he recovers

   Why: Loss of sight in one eye is a single dismemberment loss, so the policy pays the capital sum — commonly 50% of the principal sum. The full principal sum (A) is reserved for accidental death or specified multiple losses. AD&D covers dismemberment as well as death, so C is wrong, and it never pays income benefits (D). (Outline V.B)

   Reference Outline V.B (AD&D)

3. Which feature distinguishes a preferred provider organization (PPO) plan from a traditional HMO?

   • AMembers may receive covered care from out-of-network providers, at a higher out-of-pocket costCorrect
   • BMembers must choose a gatekeeper primary care physician who controls all referrals
   • CProviders are paid by capitation regardless of the services performed
   • DThe plan contracts with no providers and pays every provider the same amount

   Why: A PPO contracts with a network of providers at discounted fee-for-service rates, but members keep the freedom to go out of network in exchange for higher deductibles and coinsurance. Gatekeeper referral requirements (B) and capitation payment (C) are HMO characteristics, not PPO features. (Outline V.C)

   Reference Outline V.C (PPOs)

4. The Florida Health Insurance Coverage Continuation Act (Florida's "mini-COBRA") extends group continuation rights to employees whose employers are too small for federal COBRA. It generally applies to employers with:

   • A20 or more employees
   • BFewer than 20 employeesCorrect
   • CMore than 50 employees
   • DAny number of employees, but coverage lasts only 6 months

   Why: Florida's continuation law fills the gap below federal COBRA: it applies to small employers with fewer than 20 employees and allows qualified beneficiaries to continue group coverage for up to 18 months, paying up to 115% of the applicable premium (s. 627.6692, F.S.). The beneficiary must notify the carrier within 63 days of the qualifying event. Federal COBRA — choice A — is the rule for employers with 20 or more employees. (Outline V.E)

   Reference Outline V.E; s. 627.6692, F.S.

5. A policy pays the insured a fixed dollar amount for each day of hospital confinement, paid directly to the insured regardless of the actual medical expenses incurred or any other coverage in force. This is a:

   • ABasic hospital expense policy
   • BMajor medical policy
   • CCritical illness policy
   • DHospital indemnity policyCorrect

   Why: A hospital indemnity (hospital confinement indemnity) policy pays a flat per-day benefit directly to the insured during hospitalization, independent of actual charges — it is an indemnity supplement, not expense reimbursement. A basic hospital expense policy (A) reimburses actual room-and-board charges up to a limit, and a critical illness policy (C) pays a lump sum upon diagnosis of a specified illness such as cancer, heart attack, or stroke. (Outline V.G)

   Reference Outline V.G (Hospital indemnity; critical illness)

6. An insurer's underwriting guidelines limit individual disability income coverage to 60% of an applicant's gross EARNED income. The applicant reports a $90,000 annual salary plus $12,000 of annual dividend and interest income. What is the largest monthly benefit the insurer will approve?

   • A$4,500Correct
   • B$5,100
   • C$6,000
   • D$7,500

   Why: Only earned income counts: $90,000 x 60% = $54,000 per year, or $4,500 per month. Choice B wrongly adds the $12,000 of investment income ($102,000 x 60% / 12 = $5,100), which continues during a disability and therefore is excluded from the replacement calculation. Insurers cap replacement below 100% so the insured retains a financial incentive to return to work. (Outline V.A)

   Reference Outline V.A (Benefit amount and issue limits)

7. An insured becomes totally disabled on March 1 under a disability income policy with a 60-day elimination period. Benefits accrue monthly and are paid at the end of each benefit month. When should the insured expect the FIRST benefit payment?

   • AApproximately March 31
   • BApproximately April 30
   • CApproximately May 30Correct
   • DApproximately June 30

   Why: The 60-day elimination period runs from March 1 to about April 29, and no benefits accrue during it. Benefits then accrue for a full month and are paid in arrears, so the first check arrives near the end of May. Choice B is the classic error: April 30 is only the day the elimination period ends, at which point nothing has yet been earned. (Outline V.A)

   Reference Outline V.A (Elimination period)

8. Why do disability income insurers apply "issue and participation" limits that take into account disability coverage the applicant already has in force with other insurers?

   • ATo satisfy the coordination of benefits provision required in all individual health policies
   • BTo prevent overinsurance, which would give a disabled insured a financial incentive not to return to workCorrect
   • CBecause Florida law prohibits an insured from owning more than one disability income policy
   • DTo ensure that all disability benefits are received income-tax-free

   Why: Issue and participation limits keep total benefits from all sources below the insured's net take-home pay so that recovery and return to work remain financially attractive; this is the same moral-hazard concern behind the relation of earnings to insurance provision. Choice A is wrong because coordination of benefits applies to medical expense plans, not to disability income, which is a valued (stated-amount) benefit. (Outline V.A)

   Reference Outline V.A (Issue and participation limits)

9. A business overhead expense policy has a maximum monthly benefit of $9,000. During the first full month of the owner's disability, the practice incurs $6,200 of covered overhead expenses. What will the policy pay for that month?

   • A$6,200Correct
   • B$7,600
   • C$9,000
   • DNothing, because expenses did not reach the monthly maximum

   Why: Business overhead expense insurance is reimbursement (expense-incurred) coverage: it pays actual covered expenses up to the monthly maximum, so $6,200 is paid and the $2,800 difference is not. Choice C reflects the common error of treating BOE like a disability income policy, which is a valued contract paying the stated amount regardless of actual loss. Many BOE contracts do carry unused monthly amounts forward for use in later, heavier months. (Outline V.A)

   Reference Outline V.A (Business overhead expense)

10. Three shareholders fund a disability buy-sell agreement using a cross-purchase arrangement. Which statement correctly describes the policy ownership?

    • AThe corporation owns one policy on each shareholder and is the beneficiary of each policy
    • BEach shareholder owns a policy on each of the others, for a total of six policiesCorrect
    • CEach shareholder owns a policy on himself and names the corporation as the beneficiary
    • DA single blanket policy covering all three shareholders is owned by the plan trustee

    Why: In a cross-purchase plan the owners buy the disabled owner's interest personally, so each owner insures every other owner: with three shareholders that is 3 x 2 = 6 policies. Choice A describes the entity (stock redemption) approach, in which the corporation itself is the purchaser and therefore owns and is beneficiary of the policies — fewer policies are needed, but the remaining owners do not increase the cost basis of their own ownership interests. (Outline V.A)

    Reference Outline V.A (Disability buy-sell funding)

Topics inside this domain

• Medicare and Medicare supplement rules
• Disability income insurance

Drill other domains

• Types of Life Policies and Features (10%)
• Life Policy Riders, Provisions, Options, and Exclusions (10%)
• Life Application, Underwriting, and Policy Delivery (8%)
• Retirement and Other Life Insurance Concepts (5%)
• Health Policy Provisions, Clauses, and Riders (10%)
• Social Insurance (4%)

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