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Types of Health Insurance Policies: Practice Questions

20 free practice questions with explanations. Pick an answer for each, then check your score.

Exam weight: 16 of 100 scored questions on the Life and Health general knowledge exam. Updated 2026-11-04.

Quick study guide

This is the biggest health section of the exam. Most questions give you a need or a feature and ask which kind of policy fits.

Disability income

Individual disability income replaces part of the insured's own earnings, never all of them, so that working stays more attractive than being disabled. Three business versions: business overhead expense (pays the business's fixed costs such as rent, utilities and staff wages while the owner is disabled, not the owner's own income), disability buyout (funds a buy-sell agreement so the healthy owners can buy out a disabled owner) and key employee disability (the business owns the policy, pays for it and collects the benefit when an important employee is disabled). Group disability comes as short-term (benefits for weeks or months) and long-term (benefits for years).

Accidental death and dismemberment (AD&D) pays the principal sum for accidental death and a capital sum (all or part of the principal sum) for loss of limbs or sight.

Medical expense plans

Basic hospital, medical and surgical policies pay limited benefits for named services. Major medical covers a broad range of care, with a deductible, coinsurance and an out-of-pocket limit. Most major medical plans today are managed care plans:

Plan	Out-of-network care covered?	Primary care doctor and referrals?
HMO	No, except emergencies	Yes
EPO	No, except emergencies	Usually not
PPO	Yes, at a higher cost	No
POS	Yes, at a higher cost	Usually yes

Three tax-favored accounts: an FSA is an employer arrangement funded mainly by the employee's pre-tax pay and is generally use-it-or-lose-it; an HSA belongs to the individual, requires coverage under a high deductible health plan (HDHP) and goes with the person when they change jobs; an HRA is funded only by the employer.

Medigap, group and COBRA

Medicare supplement (Medigap) policies fill gaps in Original Medicare such as deductibles and coinsurance. Plans are standardized by letter, so every Plan G has the same benefits. Group insurance is issued as a master policy to the sponsor, with certificates for members, and is priced on the group as a whole. COBRA lets people keep employer group health coverage after a qualifying event, usually for 18 or 36 months, at up to 102% of the premium.

Long-term care and other policies

Tax-qualified long-term care pays when the insured cannot perform two of six activities of daily living or has a severe cognitive impairment. The levels of care run from skilled (by licensed professionals) to intermediate (occasional skilled care) to custodial (help with daily activities), plus home health care. Other policies pay narrower benefits: specified disease (cancer) and critical illness policies, hospital indemnity (a fixed daily amount), accident-only, dental, vision, temporary short-term medical plans and voluntary worksite products paid through payroll deduction.

Practice questions

Why do insurers usually limit an individual disability income benefit to a portion of the applicant's earnings rather than 100%?
1. A.So the insured keeps a financial reason to return to work.
2. B.Because federal law caps disability benefits at half of earnings.
3. C.Because disability benefits are always taxable.
4. D.Because Social Security always pays the remaining income.
Show answer
Answer: A. If a policy replaced all of a person's income, being disabled could pay as well as working, which invites longer claims. Insurers therefore issue only a percentage of earned income, and the NAIC uniform provisions model allows an overinsurance provision that reduces benefits when total disability coverage exceeds a stated share of earnings. Social Security disability has its own strict eligibility rules and does not automatically make up the difference, and there is no federal 50% cap.
Source: Texas content outline V.A.1; NAIC Uniform Individual Accident and Sickness Policy Provision Law (Model 180), overinsurance provision
A self-employed physical therapist wants coverage that would pay her clinic's rent, utilities and staff wages if she became disabled. Which policy fits best?
1. A.Disability buyout insurance
2. B.Hospital indemnity insurance
3. C.Key employee disability insurance
4. D.Business overhead expense insurance
Show answer
Answer: D. Business overhead expense insurance pays the ongoing fixed costs of running the business while the owner is disabled; it does not replace the owner's own income. The IRS lets a business deduct premiums for overhead insurance, while premiums for a policy that replaces the owner's lost earnings are not deductible. Key employee coverage protects the business against losing someone else, and buyout coverage funds the purchase of a disabled owner's share.
Source: Texas content outline V.A.2; IRS Publication 334: Insurance (overhead insurance; loss-of-earnings premiums)
Two partners have a buy-sell agreement. Which policy is designed to fund the purchase of one partner's share if that partner becomes totally disabled?
1. A.Individual disability income policy
2. B.Accidental death and dismemberment policy
3. C.Business overhead expense policy
4. D.Disability buyout policy
Show answer
Answer: D. A disability buyout policy pays the healthy partner or the business, usually as a lump sum, so they can buy the disabled partner's interest as the buy-sell agreement requires. Its elimination period is usually much longer than a personal disability policy's, because a buyout makes sense only once the disability looks long-lasting. Overhead expense coverage pays operating costs, and individual disability income pays the insured's own living expenses.
Source: Texas content outline V.A.3
A software company buys a disability policy on its lead engineer. The company pays the premium and receives the benefits to cover lost profits and the cost of hiring a temporary replacement. This is:
1. A.Business overhead expense insurance
2. B.Key employee disability insurance
3. C.Disability buyout insurance
4. D.Group long-term disability insurance
Show answer
Answer: B. Key employee (key person) disability insurance is owned and paid for by the business, which is also the beneficiary, and it protects the business against losing an important employee's contribution. Overhead expense coverage pays fixed costs when the owner is disabled, and buyout coverage funds the purchase of an owner's share. Group disability pays benefits to the disabled employees themselves.
Source: Texas content outline V.A.5
Under the NAIC minimum standards regulation followed by many states, accidental death and dismemberment benefits must be payable if the loss occurs within how many days of the accident?
1. A.90 days
2. B.30 days
3. C.180 days
4. D.60 days
Show answer
Answer: A. The NAIC Accident and Sickness Insurance Minimum Standards model requires AD&D benefits to be payable if the death or dismemberment occurs within 90 days of the accident. The principal sum is paid for accidental death; the capital sum, which is all or part of the principal sum, is paid for loss of limbs or sight. Individual states may set their own rules.
Source: Texas content outline V.B; NAIC Accident and Sickness Insurance Minimum Standards Model Regulation (Model 171)
Compared with basic hospital and surgical expense policies, major medical policies typically:
1. A.Cover a broad range of medical services, with a deductible and coinsurance.
2. B.Cover only hospital room and board.
3. C.Pay first-dollar benefits with low limits for a short list of services.
4. D.Pay a fixed cash amount for each day in the hospital.
Show answer
Answer: A. Major medical plans cover a wide range of hospital, medical and surgical care, and the insured shares costs through deductibles and coinsurance up to an out-of-pocket limit. Basic hospital, medical and surgical policies pay limited benefits for specific services, often from the first dollar. A fixed daily cash amount describes hospital indemnity coverage.
Source: Texas content outline V.C.1–2; Texas Department of Insurance: Health care coverage guide; NAIC Accident and Sickness Insurance Minimum Standards Model Regulation (Model 171)
An HMO member wants to see a dermatologist for a non-emergency skin problem. What does the HMO usually require?
1. A.Nothing, because HMO members may see any specialist
2. B.A referral from the member's primary care physician
3. C.A second opinion from an out-of-network doctor
4. D.Payment of the full cost up front, with a refund later
Show answer
Answer: B. In most HMOs the primary care physician acts as a gatekeeper, and the member needs a referral before seeing a specialist; without one the plan may not pay. HMOs generally cover only network providers except in an emergency. Seeing any specialist without a referral describes a PPO.
Source: Texas content outline V.C.3; HealthCare.gov glossary: Referral; HealthCare.gov glossary: Health Maintenance Organization (HMO)
A PPO member sees a doctor who is not in the plan's network, without a referral. Generally, the PPO will:
1. A.Deny the claim because out-of-network care is never covered.
2. B.Pay the out-of-network doctor's full bill with no cost sharing.
3. C.Cover the visit, but the member pays more than for an in-network doctor.
4. D.Cover the visit only if the member's primary care physician approved it.
Show answer
Answer: C. A PPO contracts with a network of providers and charges members less when they use it, but members may use out-of-network providers without a referral at a higher cost. Denying all out-of-network care describes an HMO or EPO, and needing a primary care physician's approval describes an HMO or POS plan.
Source: Texas content outline V.C.4; HealthCare.gov glossary: Preferred Provider Organization (PPO); HealthCare.gov: Health insurance plan and network types
Which type of plan usually requires a primary care physician and referrals to specialists, yet still covers out-of-network care at a higher cost?
1. A.Hospital indemnity plan
2. B.Health maintenance organization (HMO)
3. C.Exclusive provider organization (EPO)
4. D.Point-of-service (POS) plan
Show answer
Answer: D. A POS plan mixes HMO and PPO features: members usually choose a primary care physician and need referrals, but they may go out of network if they accept higher out-of-pocket costs. HMOs and EPOs generally do not cover out-of-network care except emergencies, and an EPO usually does not require a primary care physician.
Source: Texas content outline V.C.5; HealthCare.gov: Health insurance plan and network types; Texas Department of Insurance: Health care coverage guide
An employee has money left in her health flexible spending account (FSA) at the end of the plan year. Her employer's plan offers neither a grace period nor a carryover. What happens to the money?
1. A.It stays in the account indefinitely for future medical bills.
2. B.It is paid to her in cash and taxed as wages.
3. C.It is forfeited under the use-it-or-lose-it rule.
4. D.It rolls into a health savings account in her name.
Show answer
Answer: C. The IRS describes FSAs as generally use-it-or-lose-it: amounts left at the end of the plan year are forfeited. An employer may soften this with either a grace period of up to 2½ months or a limited carryover, but not both. Money that stays available indefinitely and belongs to the individual describes an HSA.
Source: Texas content outline V.C.6; IRS Publication 969: Flexible Spending Arrangements; HealthCare.gov glossary: Flexible Spending Account (FSA)
An employee covered by a high deductible health plan has been contributing to a health savings account (HSA). Which event would stop her from making new HSA contributions?
1. A.Using HSA money to pay a doctor's bill
2. B.Her employer starting to contribute to her HSA
3. C.Enrolling in Medicare
4. D.Buying a separate dental and vision policy
Show answer
Answer: C. To contribute to an HSA a person must be covered by an HDHP, have no other disqualifying health coverage, not be enrolled in Medicare and not be claimable as someone else's dependent. Dental and vision coverage are expressly allowed, employers may contribute, and paying qualified medical expenses is what the account is for.
Source: Texas content outline V.C.7; IRS Publication 969: Health Savings Accounts; HealthCare.gov glossary: Health Savings Account (HSA)
Which statement about a health reimbursement arrangement (HRA) is true?
1. A.It is funded mainly through the employee's salary reductions.
2. B.It is funded only by the employer and reimburses qualified medical expenses tax-free.
3. C.It is owned by the employee and goes with the employee to a new job.
4. D.It may be offered only with a high deductible health plan.
Show answer
Answer: B. HRAs are funded solely by employer contributions and cannot be funded through employee salary reductions; reimbursements for qualified medical expenses are tax-free, and some plans let unused amounts carry over. An account owned by the individual that moves with them is an HSA, and an HSA, not an HRA, requires HDHP coverage.
Source: Texas content outline V.C.8; IRS Publication 969: Health Reimbursement Arrangements; HealthCare.gov glossary: Health Reimbursement Arrangement (HRA)
A Medicare beneficiary compares Medigap Plan G policies from two different insurance companies. Which statement is true?
1. A.Both policies can be used to pay Medicare Advantage copayments.
2. B.The two policies may cover different benefits, since each insurer designs its own Plan G.
3. C.Both policies offer the same basic benefits; price is the main difference.
4. D.One policy can cover both the beneficiary and their spouse.
Show answer
Answer: C. Medigap policies are standardized, so policies with the same letter offer the same basic benefits no matter which company sells them; price is the difference. A Medigap policy works only with Original Medicare (Parts A and B), not with a Medicare Advantage plan, and each policy covers only one person.
Source: Texas content outline V.D; Medicare.gov: Get Medigap basics; Medicare.gov: Learn how Medigap works
Premiums for an employer's group health insurance plan are generally based on:
1. A.Each employee's individual claims history
2. B.The characteristics and experience of the group as a whole
3. C.A medical exam given to each employee
4. D.The employer's credit rating
Show answer
Answer: B. Group insurance is underwritten and priced for the whole group rather than person by person, so members usually do not have to prove good health. The contract is a master policy issued to the employer or other sponsor, and each member receives a certificate of coverage. Individual insurance, by contrast, is bought by and issued to each person.
Source: Texas content outline V.E.1–2; Texas Department of Insurance: Health care coverage guide (group insurance)
An employee voluntarily quits her job at a company with 60 employees. Under federal COBRA rules, for how long can she generally keep the employer's group health coverage, and what is the most she can be charged?
1. A.12 months, at the same share she paid as an employee
2. B.18 months, at up to 102% of the premium
3. C.36 months, at 100% of the premium
4. D.Until she reaches age 65, at up to 150% of the premium
Show answer
Answer: B. When the qualifying event is termination of employment (for any reason other than gross misconduct) or reduced hours, COBRA continuation generally lasts 18 months, and the plan may charge up to 102% of the cost of coverage. Events such as the employee's death or divorce give the spouse and children up to 36 months. COBRA does not apply to employers that normally had fewer than 20 employees in the prior year.
Source: Texas content outline V.E.3; 29 U.S.C. § 1162 (COBRA period and premium); 29 U.S.C. § 1163 (qualifying events); 29 U.S.C. § 1161 (small employer exception)
Under federal tax rules, a tax-qualified long-term care policy pays benefits when a licensed health care practitioner certifies that the insured:
1. A.Cannot perform two of six activities of daily living for at least 90 days, or has a severe cognitive impairment.
2. B.Has reached age 75 and has been diagnosed with any chronic illness.
3. C.Cannot perform any one activity of daily living for at least 30 days in a row.
4. D.Has spent at least three days in a hospital and has a doctor's order for nursing home care.
Show answer
Answer: A. Federal law defines a chronically ill individual as someone unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) for at least 90 days, or someone who needs substantial supervision because of severe cognitive impairment such as Alzheimer's disease. Age or a diagnosis by itself is not a trigger, and the NAIC long-term care model act bars policies from requiring a prior hospital stay.
Source: Texas content outline V.F.1; 26 U.S.C. § 7702B(c) (chronically ill individual); Texas Department of Insurance: Long-term care insurance guide; NAIC Long-Term Care Insurance Model Act (Model 640)
In long-term care insurance, help with bathing, dressing and eating that does not require medical training is called:
1. A.Skilled care
2. B.Custodial (personal) care
3. C.Intermediate care
4. D.Acute care
Show answer
Answer: B. Custodial or personal care helps with activities of daily living and can usually be given by someone without professional training. Skilled care is nursing or therapy that only licensed professionals can safely provide, and intermediate care is occasional skilled care. Medicare does not pay for custodial care when it is the only care needed, which is one reason people buy long-term care insurance.
Source: Texas content outline V.F.2; NAIC: A Shopper's Guide to Long-Term Care Insurance (glossary); Medicare.gov: Long-term care; Medicare.gov: Skilled nursing facility care
A policy pays the insured $200 for each day spent in the hospital, regardless of the actual hospital charges and regardless of any other insurance. This is:
1. A.Basic hospital expense insurance
2. B.Medicare supplement insurance
3. C.Major medical insurance
4. D.Hospital indemnity insurance
Show answer
Answer: D. Hospital indemnity (fixed indemnity) coverage pays a set amount per day of confinement rather than reimbursing actual expenses, and NAIC standards say its benefits are paid regardless of other coverage. Basic hospital expense and major medical policies reimburse incurred charges, and Medigap pays a share of Medicare-covered costs.
Source: Texas content outline V.G.6; Texas Department of Insurance: Alternative health plans (fixed-indemnity plans); NAIC Accident and Sickness Insurance Minimum Standards Model Regulation (Model 171)
Which statement about short-term medical insurance is generally true?
1. A.It provides temporary coverage, and the insurer can decline applicants or exclude preexisting conditions.
2. B.It renews automatically for life without new underwriting.
3. C.It is the same thing as COBRA continuation coverage.
4. D.It must cover all of the essential health benefits required of individual major medical plans.
Show answer
Answer: A. Short-term plans fill a temporary gap, such as time between jobs, and offer limited coverage; companies selling them can deny coverage or charge more for preexisting conditions and usually limit what they pay. They do not have to meet the federal essential health benefit rules, and when one ends the person may need to qualify for a new plan. COBRA is continuation of an employer's own group plan.
Source: Texas content outline V.G.7; Texas Department of Insurance: Health care coverage guide (other types of coverage); Texas Department of Insurance: Alternative health plans
A policy pays a lump-sum benefit when the insured is first diagnosed with a covered condition such as a heart attack, stroke or cancer, and the insured may spend the money however they choose. This is:
1. A.Hospital indemnity insurance
2. B.Accident-only insurance
3. C.Critical illness insurance
4. D.Major medical insurance
Show answer
Answer: C. Critical illness insurance pays a lump sum on diagnosis of a listed serious condition, and the money is not tied to medical bills. A specified disease policy is narrower still: a cancer policy, for example, pays only for cancer and nothing for other illnesses. Hospital indemnity pays per day of confinement, and accident-only coverage pays nothing for illness.
Source: Texas content outline V.G.3–4; Texas Department of Insurance: Health care coverage guide (specified disease policies)

Where these questions come from: Texas content outline (Pearson VUE #124401, effective 1 Sep 2026), Life and Health general knowledge, section V: Types of Policies — 16 of 100 scored questions. See how we write questions.