Low Frequency Effects or LFE is the .1 in DD, DTS 5.1 or 7.1 tracks. It is not the same as lower octaves of 5 or 7 speaker channels. Therefore, it is incorrect to say that setting a speaker to Small removes the LFE from that channel. Conceptuality, on bass management, you are correct though. Any signal below crossover frequency for a speaker set to small is redirected to the sub.
1. Low Pass Filter or LPF of LFE works the LFE channel in reverse of crossover for speaker channels. Signal at frequencies higher than the LPF will be rolled off according to the filter slope. This helps reduce the load on your subwoofer. The other benefit can be for folks having problems with localizing the sub (meaning it is not seamlessly blending with the mains), it removed lower mid-bass from the LFE and may help with the situation. You can leave it at 120Hz if your sub is not giving you problems.
2, 3, 4. No, you are fine since LPF of LFE only affects the signal of .1 channel. For example, if you play a CD in 2.1 mode, this setting will not do anything since your original signal was 2.0. In your case, anything in speaker channels below 80Hz is redirected to sub and is not affected.