Triggering Event: Definition and Examples

What Is a Triggering Event?

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

Life insurance policies may include a triggering event based on the insured age. Also, 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 which the investor may initiate to limit their downside risk.

Key Takeaways

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

Understanding a Triggering Event

Triggering events can encompass a wide assortment of 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 of time. These are usually outlined in an ISDA and may result in a fund's positions being closed out by the dealer if the dealer chooses to act upon the trigger.

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

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

Triggering Events in Insurance

Insurance companies will include triggers, called coverage triggers, in the policies they underwrite. In the case of property or casualty coverage, it will specify the type of event which must take place for liability protection to apply. Insurers use triggering events 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 within the contract. 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 happen before it is effective. As an 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. For instance, 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

It is common for banks to issue debt at a given interest rate on specific terms. For example, when writing a loan, one of a bank's requirements could be that the borrowing party does not incur any additional debt for the duration of the loan.

If the borrower should incur 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 rate of interest charged.

Triggering events also occur in relation to defaults on loans. Banks can stipulate certain triggers that will determine a default. If any covenants that were agreed upon beforehand are breached then that would trigger a default. Cross defaults are common trigger events whereby if an individual or business defaults on one loan it means that they have defaulted on all the other 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.

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