I have been unemployed for 4 months and possibly have to take cash out of my 401K. I understand I can waive the 10% penalty tax if I used the money to pay for Health Insurance premium. Do I need to use all of the cash I withdraw to pay for the insurance to qualify for this exception, or can I use portion of the cash I receive and use the rest to pay for other things?

Don't do it.

Try to borrow some money using your 401K as collateral

The exception for having to pay the 10% early ithdrawal penalty if you use the money for health insurance premiums applies to withdrawals from IRAs, but not 401(k) plans. This is one of those silly differences between 401(k) and IRA plans. However, you would be exempt from the early withdrawal penalty if your unreimbursed medical bills exceed 7.5% of your adjusted gros income.