How executives can prepare for unexpected life events

As a leader in your company, you put a lot of effort into your responsibilities — to the organization, your colleagues and, in many cases, your shareholders. But there are also the responsibilities you have to your family and those you love. For their sake, and yours, it’s essential to be prepared for any hurdles you may face, personally or professionally.

By taking a number of thoughtful, strategic steps, such as seeing to it that your estate plan reflects your current situation and making sure you understand your workplace benefits, you can help ensure everyone’s well-being and long-term security through any challenges that may arise.

Here are three of the most common situations and ways you might manage them.

Your company reorganizes, you get caught up in a reduction in force, a new CEO wants to bring in his own team — whatever the reason, losing a job is a jolt. It’s not an uncommon occurrence for managers and senior executives. In fact, according to a study by Live Data Technologies, a workforce data firm, nearly half of all layoffs in 2023 were at the manager level and above.¹ Consider these four approaches in the event of a job loss.

Build and maintain an emergency fund

This is your first layer of protection. “Everyone should have enough liquid assets to cover three to six months of living expenses, but some people are more comfortable setting aside enough cash to carry them through a year without an income,” says Amy Permenter, head of Corporate Executive Planning, Planning Center of Excellence, Bank of America Private Bank. “If you see that your company or industry is struggling or that a reorganization is likely, you may want to increase your financial cushion.”

Weigh the benefits of a single payout vs. periodic payments

If you are entitled to severance pay upon termination of employment, it's important to understand which benefits, if any, will continue during your severance period. Severance arrangements may be structured so that you take a lump sum instead of receiving periodic payments.

But depending on the structure of your separation agreement, taking severance in a single payout may cause your former employer to discontinue certain benefits, such as health insurance as an active employee. What’s more, depending on the timing, a lump sum could potentially push you into a higher tax bracket, leaving you with a larger income tax liability than if you had taken periodic payments.

Stay on top of stock options and awards

If you have unvested stock options or outstanding incentive awards, whether they vest upon termination of employment will likely be conditional, depending on the reason you’re leaving your job. (A company may accelerate vesting in the case of death, for example, but not if you’re let go as a result of company layoffs.) The awards and stock options may not be the windfall you expect, however. “Restricted stock awards, restricted stock units and stock options are each taxed differently, and once you’re no longer an employee, your company may not withhold taxes,” says Stratford Kiger, a private client advisor for Bank of America Private Bank. “People often execute whatever options they need to in order to make up for a loss in income, and they are totally unprepared for the amount of taxes they end up owing the following April — often when cash flow is tight.”

To help soften the tax blow, she suggests electing to negotiate for an immediate lump sum cash payment for the estimated value of any unvested stock, then to negotiate separately to receive severance payments the following year. You should consult with a tax advisor to discuss your equity awards and the choices you have available.

Bring in your advisor to help

Share the details of your severance package with your advisor, who can suggest the best assets to consider tapping if you need to replace lost income and adjust your overall financial plan. “During the intense emotions that accompany leaving a job, an advisor can provide the objectivity that allows you to make the best financial decisions for yourself and your family,” says Kiger. When weighing the impact of a sudden loss of compensation and the need to replace income for living expenses, for example, it’s important to consider the tax consequences of asset sales on your overall wealth.

If you’ve exercised stock options, your portfolio may be too heavily weighted in company stock and in need of rebalancing. An advisor can also help you decide whether to keep your 401(k) with your former company, if allowed, or to roll it into an individual retirement account. 

For many people, the possibility of becoming disabled during their career seems remote — yet, according to the Social Security Administration, 25% of employed individuals will experience a disability and be unable to work for at least a year before they reach retirement age.²

Whether it’s for the short or long term, such an event affects more than your income. “You may have a higher cost of living due to medical costs, and you may no longer be able to save like you did when you were working,” Permenter says. “A disability can completely change your financial plan, which is why it’s important to consider disability coverage while you’re healthy, to protect your family’s financial future.” To protect yourself — and those you love — consider these suggestions: 

Raise your long-term disability coverage

Most companies offer a long-term disability plan that will replace 50% to 60% of an employee’s income. But these policies have caps, and for a high earner, a group policy may ultimately cover only 30% to 50% of your income. If you’re paying the premium with pre-tax dollars, your replacement income will be further reduced by taxes.

As a result, executives may want to purchase individual disability insurance to supplement their company’s group plan. An individual disability policy may cover 75% or more of your income and, if obtained as part of a group offering from your employer, is likely to be less expensive than from an insurance company. In addition, a company-sponsored policy may subject you to less rigorous health underwriting that could disqualify you from an insurer’s plan if you have health issues.

Ensure your profession is covered

You should also check to see that the individual disability policy covers you if you can no longer work in your current profession — instead of being valid only if you can’t perform any job, which could require you to take a much less rewarding position.

Get your estate documents in order

It’s important to review your estate plan in advance of a potential event that could result in a serious disability, so that you can be confident your family has the financial support it needs. See to it that you have a durable power of attorney in place for financial matters and have assigned a proxy or agent for healthcare, along with a healthcare directive. “These documents are important at every stage in adult life, but they are essential should you become disabled, because they enable a trusted person to make decisions in your best interest if you’re unable to do so,” Permenter says.

If you were to pass suddenly, you’d want to see to it that the people who depend on you will have their financial needs met. It’s especially important to have a family conversation on the extent of your wealth as well as providing details of your estate plan. This conversation may lead to new insights or changes that need to be made in your estate plan. You can provide details, for example, about how the estate will pay down liabilities, such as an existing mortgage, and have sufficient assets to fund college education for children or grandchildren. Here are some steps to consider when discussing your plans with your financial advisor:

Be thoughtful about life insurance

Life insurance can play an import role in your estate plan, with the type of policy differing based on what you want the insurance to accomplish. Younger executives may prefer a 20- or 25-year term policy that provides cash to take care of their families, pay off a mortgage, fund their children’s education and replace their income for a certain period. As you get older, you may have enough assets to provide for a surviving spouse’s living expenses. As your balance sheet grows, however, you may want a life insurance policy to pay or offset estate taxes at your death. Keep in mind that life insurance is easier and less expensive to obtain at younger ages when individuals are generally the healthiest.

Go beyond company coverage

Your employer likely offers basic life insurance up to a certain multiple of your income. But that policy is in effect only while you’re at the company. “You want your life insurance coverage to stay with you for the duration of your need,” Kiger says. “To have a portable policy that covers you no matter how many times you change jobs, it makes sense to obtain life insurance outside your company, especially if you don’t have a high health risk.”

Permenter adds that supplemental life insurance offered by your employer may also be more expensive than a policy you can acquire on your own, starting as early as age 35.

Explore how a trust may help

You may also want to consider placing your life insurance policy in a trust, especially if you expect to have a taxable estate. Doing so can remove the policy’s payout from your estate and allow the proceeds to go directly to your beneficiaries without being subject to federal estate taxes. Administered by a trustee of your choosing, a trust can also control how the proceeds are distributed to your beneficiaries.

Anticipating and making plans to manage unexpected life events can seem like a speculative and potentially needless exercise, especially when you’re relatively young and the chances of any of these events coming to pass seem slim. But just in case they do, taking a few proactive steps now can help keep your financial life, and that of your family, on track for the duration of your career.