What do income replacement contracts do?

Income replacement contracts are specifically designed to provide financial support in the event of a disability that prevents someone from working. These contracts replace a percentage of the individual's lost income, allowing them to maintain a certain standard of living while they are unable to earn due to their disability.

This approach is particularly beneficial as it directly ties the benefits to the individual's previous earnings, ensuring that the financial assistance is tailored to their personal financial needs. It allows for ongoing financial stability during a challenging time, as the insured can plan their expenses based on a known percentage of their pre-disability income.

The other options do not adequately reflect the purpose of income replacement contracts. For example, paying out a lump sum on diagnosis pertains more to critical illness or life insurance policies rather than income replacement. A fixed monthly payment, regardless of earnings, does not account for varying income levels, and covering all medical expenses incurred is typically the focus of health insurance rather than income replacement.