Triggering Event: Definition and Examples

Maya Dollarhide is a financial journalist with over 10 years’ experience explaining complex financial topics, such as managing student loans, purchasing a home, and saving for retirement.

What Is a Triggering Event?

A triggering event is a barrier or occurrence that, once breached or met, causes another event to occur. Triggering events include job loss, retirement, or death, and are common in contracts. These triggers help to prevent or ensure that, in case of a catastrophic change, the terms of the original contract may also change.

Life insurance policies may include a triggering event based on the insured age. Many employers require employees to reach a qualifying period of employment as a triggering event for eligibility for specific company benefits. In the investment sphere, stops are a triggering event that investors may initiate to limit their downside risk.

Key Takeaways

• Contracts often maintain contingency clauses that alter the parties’ rights and obligations.
• Triggering events include job loss, retirement, or death and are common in many contracts.
• These triggers help to prevent or ensure that, in case of a catastrophic change, the terms of the original contract may also change.
• Insurance policies are contracts that have important triggering events to initiate a claim.

Understanding a Triggering Event

Triggering events can encompass various areas and contracts. For example, hedge funds sign documents that trigger termination events when their net asset value (NAV) falls below a certain level in a given period. These are outlined in an ISDA and may result in a fund’s positions being closed out by the dealer.

Age limits in retirement plans can also be trigger events. For most retirement plans, such as 401(k)s, individuals cannot withdraw funds without a penalty until they reach a specific age. Once that age limit is reached, they can withdraw funds without penalty.

A triggering event is any occurrence that alters the current state of a contract.

Triggering Events in Insurance

Insurance companies include triggers, called coverage triggers, in the policies they underwrite. In property or casualty coverage, the type of event that must take place for liability protection to apply is specified. Triggering events allow insurers to limit their risk exposure. Some typical triggering events include:

• Attainment of retirement age, as defined under the plan
• Termination of employment
• A participant becomes disabled, as described under the plan
• The death of the participant

In some universal life insurance policies, in-service withdrawals are allowed from the cash portion of the policy. These withdrawals allow for tax and penalty-free distributions before an age-based triggering event.

Workers’ compensation is another insurance that requires a triggering event to be effective. For example, if an individual has an accident while at work, that event would "trigger" disability payouts from insurance.

The most common triggering event in an insurance policy is a cause to initiate a claim. In life insurance, the death of the insured would be the triggering event that leads to the payout of the death benefit to the insured’s beneficiaries.

Triggering Events With Banks

Banks commonly issue debt at a given interest rate on specific terms. For example, when writing a loan, a bank may require that the borrowing party does not incur any additional debt during the loan’s duration.

If the borrower incurs more debt, the contract’s triggering event or clause will kick in. The bank may then take necessary actions to protect themselves, which may include foreclosure of property secured through the loan or increasing the original interest rate.

Triggering events also occur in relation to loan defaults. Banks can stipulate triggers that determine a default. Breaching any agreed-upon covenants would trigger a default. Cross defaults are common trigger events, whereby defaulting on one loan means defaulting on all loans under the cross-default agreement.

Banks can include a wide range of default triggering events, so it is important to carefully understand your contract before signing.

Banks can include a wide range of default triggering events, so it is important to carefully understand your contract before signing.