FDIC Insurance: Are You Covered?

Recent bank failures can teach us a thing or two about the importance of adequate FDIC insurance coverage..

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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 bankfailure, 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 bankruptcy.

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:

Single Accounts

  • Individual Accounts $100,000* maximum FDIC insurance for all combined accounts. Combination checking accounts, savings accounts, and CDs cannot exceed the $100,000 FDIC limit.
  • 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.

Married

  • 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 individuals.
  • 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.