I called UKBA yesterday, and supposedly I did submit a valid application upon my third try. They have very poor customer service by the way. I actually laughed at the woman, but only because her responses to me were so ridiculous.
From what I understand, here's the rub in regards to my issues.
1. You do need insurance if your sponsor is not a worker.
2. Your sponsor either be a worker or student, but not both.
3. It is okay to explain that your sponsor is both a student and worker, but very clearly explain that they are sponsoring you as one or the other.
Thanks for the deluge of information.