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Overview
Health insurance encompasses a wide range of plan structures, from traditional indemnity plans to managed care organizations and government programs. This guide covers the major health insurance types tested on the Life & Health License Exam, including how plans are structured, how benefits are paid, and how plans differ from one another. Mastering these distinctions is essential for both the exam and real-world insurance practice.
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Indemnity & Traditional Plans
Summary
Traditional health insurance plans pay benefits in a defined way—either as fixed dollar amounts or as reimbursement for actual expenses. Understanding the relationship between basic plans, major medical plans, and comprehensive major medical plans is critical.
Key Concepts
• Hospital Indemnity Plan: Pays a fixed dollar amount per day of hospitalization, completely independent of actual medical costs incurred. The insured receives the benefit regardless of what the hospital actually charges.
• Basic Medical Expense Plan: Covers specific, named services (hospital room and board, surgery, etc.) with defined dollar limits. Features first-dollar coverage — no deductible required — but has strict benefit caps.
• Major Medical Plan: Designed for broad, catastrophic coverage. Requires a deductible and coinsurance, but covers a wide range of expenses up to a high maximum benefit.
• Comprehensive Major Medical Plan: A single combined policy that merges basic and major medical coverage. After one deductible is met, broad coverage begins — no separate base plan limits apply.
• Corridor Deductible: A gap amount the insured must pay between what a basic plan pays out and where major medical coverage begins. Acts as a bridge between the two coverages.
• Coinsurance: After the deductible is met, the insured and insurer share costs at a set ratio (typically 80/20 — insurer pays 80%, insured pays 20%) until the out-of-pocket maximum is reached.
Key Terms
• First-Dollar Coverage – Benefits begin with the first dollar of expense, no deductible required
• Deductible – Amount the insured pays before insurance begins paying
• Out-of-Pocket Maximum – The cap on what the insured pays; insurer covers 100% after this point
• Coinsurance – Percentage cost-sharing between insured and insurer after the deductible
Watch Out For
> ⚠️ Hospital indemnity pays a fixed daily amount — NOT based on actual expenses. Don't confuse it with reimbursement-style plans.
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> ⚠️ The corridor deductible only exists in plans that combine a separate basic plan with major medical — it does NOT apply to comprehensive major medical plans.
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> ⚠️ Coinsurance is not the same as a copay. Coinsurance is a percentage; a copay is a fixed dollar amount.
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Managed Care Plans
Summary
Managed care plans control costs by coordinating care through networks of providers. The key distinctions involve network restrictions, referral requirements, and how providers are paid. Know each plan type's structure cold.
Plan Comparison Table
| Feature | HMO | PPO | EPO | POS |
|---|---|---|---|---|
| PCP Required | ✅ Yes | ❌ No | ❌ No | ✅ Yes |
| Referrals Required | ✅ Yes | ❌ No | ❌ No | ✅ (in-network) |
| Out-of-Network Coverage | ❌ No | ✅ Yes (higher cost) | ❌ No | ✅ Yes (higher cost) |
| Network Restriction | Strict | Flexible | Strict | Hybrid |
HMO Models
• Staff Model HMO: Physicians are salaried employees of the HMO; they work at HMO-owned facilities and see only HMO patients.
• Group Model HMO: HMO contracts with an independent multispecialty physician group; that group sees only HMO patients but is not employed by the HMO.
• IPA Model HMO (Independent Practice Association): HMO contracts with an association of independent physicians who maintain their own private practices and see both HMO and non-HMO patients. Paid via capitation or fee-for-service.
Key Concepts
• Capitation: Provider receives a fixed monthly payment per enrolled member, regardless of how many services that member actually uses. This is the hallmark HMO payment method.
• Primary Care Physician (PCP): The "gatekeeper" in HMO and POS plans who coordinates all care and provides referrals to specialists.
• PPO: Members may see in-network or out-of-network providers without a referral; out-of-network is covered but at higher cost sharing.
• EPO: Like an HMO in that only network providers are covered (except emergencies), but like a PPO in that no PCP or referrals are required.
• POS Plan: A hybrid — has a PCP and network coordination like an HMO, but allows out-of-network self-referrals at higher cost like a PPO.
Key Terms
• Capitation – Fixed per-member monthly payment to providers
• Network – The group of providers contracted with the plan
• In-Network – Providers with a contracted agreement; lower cost to member
• Out-of-Network – Providers without a contract; higher cost or no coverage
• Gatekeeper – The PCP role in HMO/POS plans who controls specialist access
Watch Out For
> ⚠️ EPO ≠ HMO: Both restrict to network only, but EPOs typically do not require a PCP or referrals. This is a common trap question.
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> ⚠️ POS ≠ PPO: POS plans still require a PCP and referrals for in-network care. PPOs require neither.
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> ⚠️ In the IPA model, physicians are NOT employees of the HMO — they are independent contractors. Don't confuse with the Staff Model.
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Government Health Programs
Summary
Medicare and Medicaid are the two major government health programs. Know who each serves, what each part covers, and how private insurance (Medigap, Medicare Advantage) interacts with them.
Medicare — The Four Parts
| Part | Name | What It Covers | Funding |
|---|---|---|---|
| Part A | Hospital Insurance | Inpatient hospital, skilled nursing facility, hospice, home health | Payroll taxes (generally premium-free) |
| Part B | Medical Insurance | Outpatient services, physician visits, DME, preventive care | Monthly premiums + federal tax revenues |
| Part C | Medicare Advantage | All Part A & B benefits via private plans (HMO/PPO); often includes dental/vision | Private insurer contracts with Medicare |
| Part D | Prescription Drug | Outpatient prescription drugs | Monthly premiums + deductibles/copays |
Medicare Eligibility
• Age 65+ and eligible for Social Security, OR
• Under 65 with certain qualifying disabilities or End-Stage Renal Disease (ESRD)
Medicaid
• Joint federal-state program for low-income individuals and families
• Eligibility based on income (generally ≤138% of the Federal Poverty Level in ACA expansion states) and categorical requirements
• Benefits and administration vary by state
Medicare Supplement (Medigap)
• Sold by private insurers to cover Medicare's "gaps" — deductibles, coinsurance, and copayments
• Federally standardized and designated by letter plans (e.g., Plan G, Plan N)
• Can only be used with Original Medicare (Parts A & B) — NOT with Medicare Advantage (Part C)
Key Terms
• Skilled Nursing Facility (SNF) – Post-acute medical care facility covered under Part A (with conditions)
• Durable Medical Equipment (DME) – Wheelchairs, walkers, oxygen equipment; covered under Part B
• Medigap – Supplemental private insurance that fills Original Medicare cost gaps
• Medicare Advantage – Private plan alternative to Original Medicare (Part C)
Watch Out For
> ⚠️ Medigap cannot be used with Medicare Advantage. Medigap only supplements Original Medicare.
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> ⚠️ Medicare does NOT cover custodial/long-term care (bathing, dressing, eating). This is a key exam point and the reason LTC insurance exists.
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> ⚠️ Medicaid is income-based; Medicare is age/disability-based. These are entirely separate programs.
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> ⚠️ Part A is generally premium-free for those who worked 40+ quarters; Part B requires a monthly premium.
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Specialty Health Coverage
Summary
Specialty health policies cover specific needs not addressed by major medical or government plans. Each has a distinct purpose, trigger mechanism, and benefit structure.
Long-Term Care (LTC) Insurance
• Covers custodial care — assistance with Activities of Daily Living (ADLs)
• The 6 standard ADLs: Bathing, Dressing, Eating, Toileting, Transferring (mobility), Continence
• Care settings: nursing homes, assisted living, adult day care, or at home
• NOT covered by traditional health insurance or Medicare (except very limited skilled nursing)
• Benefit Trigger: The condition that activates benefits — typically inability to perform 2 of 6 ADLs OR cognitive impairment (e.g., Alzheimer's disease)
Disability Income (DI) Insurance
• Replaces a portion of lost income when the insured cannot work due to illness or injury
• Pays a monthly cash benefit — does NOT reimburse medical expenses
• Fundamental distinction: income replacement vs. expense reimbursement
• Key policy elements: elimination period (waiting period), benefit period, definition of disability
Critical Illness Insurance
• Pays a lump-sum cash benefit upon first diagnosis of a covered condition
• Common covered conditions: cancer, heart attack, stroke
• Benefit may be used for any purpose — medical bills, lost income, household expenses, or anything else
• Unlike DI, the trigger is diagnosis, not inability to work
Dental Expense Insurance
• Covers preventive (exams, X-rays, cleanings), basic restorative (fillings, extractions), and major restorative (crowns, bridges, dentures) services
• Typically subject to annual maximum benefits and waiting periods for major services
Accident-Only Insurance
• Provides benefits exclusively for accidental injuries — does NOT cover illness
• Classified as a limited benefit policy
• May provide medical expense reimbursement or a fixed cash benefit
Key Terms
• ADLs – Activities of Daily Living; the functional benchmarks for LTC benefit triggers
• Elimination Period – Waiting period before disability or LTC benefits begin (similar to a deductible in time)
• Benefit Period – Duration for which benefits will be paid under a DI or LTC policy
• Lump-Sum Benefit – Single one-time payment (used in critical illness and accidental death policies)
• Custodial Care – Non-skilled assistance with daily activities; covered by LTC, NOT Medicare
Watch Out For
> ⚠️ Medicare does NOT cover custodial/long-term care. It only covers skilled nursing care and only under strict conditions for a limited time.
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> ⚠️ DI insurance pays for lost income, NOT medical bills. This is a fundamentally different type of benefit than health expense coverage.
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> ⚠️ Critical illness pays on diagnosis, regardless of whether the insured is disabled or has incurred specific medical expenses.
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> ⚠️ Accident-Only policies are limited benefit plans — they are not a substitute for comprehensive health coverage.
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Group vs. Individual Health Insurance
Summary
Group and individual health insurance differ significantly in underwriting, eligibility, and continuation rights. COBRA is a critical area for the exam.
Key Distinctions
| Feature | Group Health Insurance | Individual Health Insurance |
|---|---|---|
| Underwriting Basis | Entire group as a whole | Each individual applicant |
| Evidence of Insurability | Generally NOT required | Usually required |
| Adverse Selection Control | Participation requirements | Individual underwriting |
| Cost | Generally lower (employer contribution) | Generally higher |
| Portability | COBRA continuation rights | Policy stays with the individual |
Group Underwriting Principles
• Group underwriting evaluates the risk characteristics of the entire group, not individuals
• Minimum Participation Requirement: Typically 75% of eligible employees (those not covered elsewhere) must enroll to reduce adverse selection and ensure a balanced risk pool
• The employer often contributes to premiums, reducing adverse selection pressure
COBRA (Consolidated Omnibus Budget Reconciliation Act)
COBRA allows qualified beneficiaries to continue group health coverage after a qualifying event.
| Qualifying Event | Maximum Continuation Period |
|---|---|
| Job loss or reduction in hours | 18 months |
| Divorce or legal separation from covered employee | 36 months |
| Death of covered employee | 36 months |
| Employee becomes eligible for Medicare | 36 months (for dependents) |
| Dependent child loses dependent status | 36 months |
• Applies to employers with 20 or more employees
• The qualified beneficiary pays the full premium plus up to 2% administrative fee
• The beneficiary must be notified and has 60 days to elect COBRA continuation
Key Terms
• Adverse Selection – The tendency for higher-risk individuals to seek coverage more than lower-risk individuals
• Participation Requirement – Minimum percentage of eligible employees who must enroll
• COBRA – Federal law providing continuation rights for group health coverage after qualifying events
• Qualifying Event – A triggering event that gives rise to COBRA continuation rights
• Qualified Beneficiary – An individual entitled to COBRA continuation (covered employee, spouse, or dependent child)
Watch Out For
> ⚠️ 18 months vs. 36 months: Job loss = 18 months. Divorce, death, Medicare eligibility of employee, or loss of dependent status = 36 months.
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> ⚠️ Under COBRA, the individual pays the full cost of the premium (both the employee share and employer share) plus a 2% admin fee — it is NOT subsidized.
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> ⚠️ COBRA applies to employers with 20+ employees. Smaller employers may be subject to state mini-COBRA laws with different rules.
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> ⚠️ The 75% participation requirement is based on eligible employees not covered elsewhere — employees with coverage through a spouse do not count against the participation calculation.
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Quick Review Checklist
Use this checklist to confirm you can answer each item before your exam:
Indemnity & Traditional Plans
• [ ] Explain how a hospital indemnity plan pays benefits (fixed daily amount, not tied to expenses)
• [ ] Distinguish basic medical expense from major medical coverage
• [ ] Define comprehensive major medical and what makes it "comprehensive"
• [ ] Explain the corridor deductible and when it applies
• [ ] Describe how coinsurance works and the typical 80/20 split
Managed Care Plans
• [ ] Name and describe all four HMO model types (Staff, Group, IPA, Network)
• [ ] Define capitation and identify which plan type uses it
• [ ] Differentiate HMO, PPO, EPO, and POS by network rules and referral requirements
• [ ] Explain the role of a PCP/gatekeeper in HMO and POS plans
Government Programs
• [ ] State what each Medicare Part (A, B, C, D) covers
• [ ] Identify Medicare eligibility criteria (age 65+ / disability)
• [ ] Distinguish Medicare from Medicaid (age-based vs. income-based)
• [ ] Explain what Medigap covers and that it cannot be used with Medicare Advantage
• [ ] State that Medicare does NOT cover custodial/long-term care
Specialty Coverage
• [ ] Define the 6 ADLs and explain their role in LTC benefit triggers
• [ ] State the two most common LTC benefit triggers (2 of 6 ADLs or cognitive impairment)
• [ ] Distinguish DI insurance (income replacement) from medical expense insurance (cost reimbursement)
• [ ] Explain when a critical illness benefit is paid (upon first diagnosis)
• [ ] Identify accident-only policies as limited benefit