Which statement accurately describes income replacement contracts?

Income replacement contracts are designed to provide financial support to individuals who are unable to work due to a disability. The correct statement highlights that these contracts calculate benefits based on a percentage of the individual's lost income rather than a fixed dollar amount or defining payments based on specific conditions like total disability. This percentage-based approach allows for a more tailored financial assistance plan, ensuring that the benefits align closely with the individual's prior earnings and financial needs during their recovery period.

The flexibility of calculating benefits based on lost income percentage helps accommodate various income levels and occupations, providing a more equitable solution for those who face different types of disabilities. This method encourages policyholders to maintain a certain level of income protection that reflects their actual financial situation rather than an arbitrary fixed sum.