FDIC Insurance: Are You Covered?
Recent bank failures can teach us a thing or two about
the importance of adequate FDIC insurance.
Financial failures can often teach us valuable lessons. Just recently, the failure was IndyMac bank, giving
us a lesson in the importance of sufficient FDIC protection.
This failure of one of the nation's largest banks shows us just how important it is to keep a close eye on
our money. There are a few lessons to be learned here. First off, we can see from this example, that no
institution is truly safe. Anything can happen in today's tumultuous economy. Fortunately, we don't have to
lose too much sleep, as the Federal Deposit Insurance Corporation (FDIC) provides us with protection.
This protection is limited, however. The current FDIC insurance limit is $100,000 (please see new
limits noted at bottom) per deposit for individual bank accounts. Retirement accounts, such as an
Individual Retirement Account (IRA) provide protection of up to $250,000.
It is not at all unusual to see individual accounts exceeding these maximum FDIC limits. This can be
particularly true with banks that make enticing offers with attractive teaser rates. It is estimated that about
$1 billion of the IndyMac bank deposits were not FDIC insured. This will negatively affect some 10,000
bank depositors who would have otherwise been protected, had they been more cautious.
It's important not to get too careless when looking for the best CD rates. Finding an attractive rate is
important, but it's equally important to not exceed the FDIC limits. This is done, all too commonly. A
$100,000 deposit, for example, made into a 5 year CD earning 5% could potentially put $28,400 of
compound interest at risk. The smart thing to do here would be to take the interest payments, rather than
risk the earnings, or start with a lower amount. In fact, there are many reasonable solutions to this
problem. Most commonly you could open additional accounts at different banks. Or structure your
accounts in the form of joint accounts or trusts so that you're adequately covered.
If you're unfortunate enough to be over the $100,000* FDIC limit during a bank
failure, you could potentially lose everything you have that's over that limit. But,
all is not typically lost. After some time and inconvenience you can usually
expect to get back at least some of your money. This is because you're
treated as a creditor to the bank during the liquidation of assets and
Now is as good a time as any to take a closer look at some FDIC basics:
What is the FDIC?
The Federal Deposit Insurance Corporation (FDIC) was formed as a result of
the numerous bank failures during the Great Depression. The FDIC is a US
government corporation created by the Glass-Steagall act of 1933. It provides
protection for bank deposits of member banks.
How Much does FDIC Insurance Cover?
The current limit is $100,000* per depositor, but does not limit accounts at
different banks. So, you could potentially keep $100,000 in three separate
bank accounts for a total of $300,000 of FDIC insured deposits. There is
really no limit to this, you could have a hundred different accounts insured for
$100,000* apiece (call me if this is the case) for a total of $10 million.
Retirement accounts are insured up to $250,000.
What to do, if you have more than $100,000 to deposit?
The obvious thing to do is to hold accounts under the $100,000* FDIC limit in
separate banks. The convenient alternative to this would be to open different
accounts at the same institution. This is a limited solution, but can be
adequately set up in the following ways:
- Individual Accounts $100,000* maximum FDIC insurance for all combined accounts.
Combination checking accounts, savings accounts, and CDs cannot exceed the $100,000 FDIC
- Retirement Accounts $250,000 maximum insurance for all combined retirement accounts. This
could include IRA and other retirement accounts.
- Revocable Living Trust (Testamentary) can be set up, providing $100,000* of FDIC protection
per qualified beneficiary.
For illustrative purposes the above individual could have the potential for $550,000 of FDIC protection.
This assumes a combined total value of $100,000 in CD's, checking, or other deposits. $250,000 in
combined retirement accounts. And $200,000 for a living trust with two (can be more) beneficiaries.
- Two Accounts $200,000* for two single separate ownership accounts. Combination of each
person's checking accounts, savings accounts, and CDs cannot exceed the $100,000 FDIC limit.
- Joint Account A married couple for example could set up a joint account that would be insured
for up to $200,000 (2 x $100,000* FDIC limit).
- Retirement Accounts $250,000 maximum insurance for all combined retirement accounts, per
person. This would provide a maximum FDIC protection of $500,000 (2 x $250,000) for both
- Revocable Living Trust (Testamentary) can be set up, providing $100,000 of FDIC protection
per qualified beneficiary. Both the husband and the wife can do this individually. This has the
potential to double the protection.
In the case of the married couple, they have the potential for $1,100,000 of FDIC protection. This
assumes a combined total value of $200,000 in CD's, checking, or other deposits. Joint accounts in the
amount of $200,000. $500,000 in combined retirement accounts. And $200,000 for a living trust with two
(can be more) beneficiaries.
It is important to verify with the FDIC that all of your bank accounts have the proper FDIC insurance. Not
all institutions are FDIC members. You can check this by contacting the FDIC consumer hotline at 877-
275-3342. Alternatively, you can check online at fdic.gov to see whether your bank is covered.
*Editors note regarding the new FDIC insurance limits: Late last year, FDIC and NCUA deposit
insurance was temporarily raised from $100,000 to $250,000 until the end of 2009 in response to the
financial crisis. In May 2009, Congress extended the $250,000 level to Dec. 31, 2013. Please note that
the above numbers and scenarios are based on the old numbers.
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