How to Make Sure Your Cash Investments Have FDIC Protection

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How to Make Sure Your Cash Investments Have FDIC Protection
by Rob Williams, Director of Income Planning, Schwab Center for Financial Research
Updated June 5, 2009

The string of bank failures in 2008 and early 2009, including IndyMac Bank and Washington Mutual, have been a stark reminder of the value of Federal Deposit Insurance Corporation (FDIC) protection for your cash and cash investments. Although bank failures have been relatively rare historically, it’s prudent to evaluate the steps you can take to protect the assets you have in the banking system.

Steering depositors away from panic and instilling public confidence in the banking system were reasons why Congress created the FDIC in 1933 as an independent agency of the United States. The FDIC insures deposits at nearly 8,500 banks and savings associations and is backed by the full faith and credit of the U.S. government. When a bank fails (which has happened more than 150 times over the last 15 years), depositors can take comfort in knowing the FDIC is required to make them whole on their insured balances as soon as possible.

Based on its previous track record, the FDIC has typically made insured deposits available within a few days after a bank closing, using cash available in the FDIC Insurance Fund. The FDIC has a long-standing line of credit to the U.S. Treasury. Historically, the FDIC relies on bank assessments to fund the Insurance Fund, but has access to these additional funds if required.

Given these protections, the most important takeaway for bank depositors is to maximize the amount of their balances that fall under the FDIC insurance safety blanket. With a little planning, depositors can greatly increase their insured amounts and significantly reduce their exposure to loss should their banks fail.

Here are a few ideas to help you get started:

Make deposits at FDIC-insured banks. The FDIC logo should be plainly displayed on their website and in their branches.
Make sure you understand the rules of insurance coverage. The FDIC aggregates each customer’s deposits, such as checking accounts, savings accounts and certificates of deposit (CDs), into several “ownership categories” that each receives separate FDIC insurance coverage. Understanding and taking advantage of these ownership categories is the primary way for depositors to maximize their FDIC-insured balances.

The FDIC expanded the insurance guarantee from $100,000 to $250,000 for covered accounts and CDs in October 2008, to expire December 31, 2009, but extended this expansion of the guarantee in May 2009 to expire December 31, 2013.

Ownership Category	Insurance Limit
Single accounts	$250,000 (recently extended from $100,000, until December 31, 2013) per depositor across all accounts of the same category. Includes sole proprietorship accounts.
Joint accounts	$250,000 (until December 31, 2013) per owner across all accounts.
Certain retirement accounts	$250,000 per owner, excluding Coverdell education savings, health savings and medical savings accounts.
Revocable trust accounts	$250,000 (until December 31, 2013) per beneficiary per owner. Includes both formal and informal revocable trust accounts.
Irrevocable trust accounts	$250,000 (until December 31, 2013) per trust when trust has contingencies.
Employee benefit plan accounts	Up to $250,000 (until December 31, 2013) for each participant's noncontingent interest in the plan.
Corporation, partnership and unicorporated association accounts	$250,000 (until December 31, 2013) per incorporated entity, partnership, or unincorporated association.
Government accounts	$250,000 (until December 31, 2013) per official custodian of the government entities. Demand deposits are separately insured from savings deposits.

Make the most of the first four ownership categories listed above (the most common categories) to maximize coverage. As an example, with careful planning, a married couple can have $3 million of FDIC coverage. Here’s how:

Account Title	Insured Amount
Wife's individual savings accounts, checking accounts and CDs	$250,000
Husband's individual savings accounts, checking accounts and CDs	$250,000
Husband and wife joint checking accounts, savings accounts and CDs	$500,000
Husband's retirement account (IRA)	$250,000
Wife's retirement account (IRA)	$250,000
Husband and wife's living trust account naming three children as beneficiaries	$1,500,000
Total	$3,000,000¹

When purchasing CDs through a brokerage account, make sure to stay under the $250,000 insurable limit with any single issuing bank, and don’t forget to consider any other deposits you may have with an issuing bank (e.g., if you already have deposits totaling $250,000 with a bank, don’t purchase CDs from the same bank in the same ownership category). Keep in mind that if you purchase a CD with a maturity date after December 31, 2013, the insurance amount is scheduled to revert back to $100,000.
A lesser-known ownership type is the payable-on-death (POD) account, a type of informal revocable trust. Using this type of account can increase your total insurable amount because the coverage is given for each beneficiary.
Be aware of the implications of bank mergers and acquisitions. If you have deposits at both banks, you may inadvertently end up with uninsured balances. However, the FDIC provides a six-month grace period where the ownership categories are insured separately for each affected bank. If necessary, make sure to restructure your accounts within that time period.
Periodically review your beneficiaries for your trust accounts, because the death of a beneficiary can reduce your FDIC coverage. For more help, see the Rande Spiegelman article, "Losing a Loved One."
Because the deposit insurance rules are so complex, you may want to use FDIC’s online tool, Electronic Deposit Insurance Estimator (EDIE), to estimate your total coverage at any particular bank.
If, after exhausting all of your options, you still have uninsured balances remaining, then your final option is to open another account at a different bank.
By understanding the FDIC rules and structuring your accounts appropriately, you can ensure that all of your bank deposits are insured. That way, if you’re ever affected by a bank failure, it may be easier to sleep at night knowing that your insured deposits are backed by government support.

What if my bank fails?
If you’re one of the unlucky few who has uninsured deposits at a bank that has already failed, there’s not much you can do to increase your insured amounts at this stage. However, there are some important things you should know and actions you should take in order to maximize the recovery of your assets:

Take an inventory of all of your bank deposit accounts at the failed bank. Collect information such as account balances, account names and names of beneficiaries. Make sure to include any CDs issued by the bank that were purchased in brokerage accounts.
If you or your family’s account balances total more than $250,000, use the FDIC online tool EDIE to estimate your insurance coverage. Due to separate coverage on different ownership categories, your accounts may be covered beyond the basic coverage amount. Any account balance exceeding your FDIC coverage is considered an uninsured deposit. For more information on FDIC coverage, please refer to FDIC's comprehensive guide, Your Insured Deposits.
Expect interest rates on CDs issued by a failed bank to be reduced. It’s important to know that the acquiring bank has the right to change CD terms; however, you also have the right to terminate without penalty. Should you choose to do so, the new bank would pay back your principal in full. You could then re-invest elsewhere, if you’re not happy with the new interest rate or terms. Any CDs transferred to an acquiring bank, however, will continue to be FDIC insured.
Continue making loan payments on outstanding debt owed to the failed bank. The terms of the loan are fixed, and you’re contractually obligated to pay. However, if you have any uninsured deposits at the failed bank, you may be able to deduct the outstanding loan balance from the uninsured balance if the title on both is the same; discuss this with an FDIC claims agent.
Make an appointment with an FDIC claims agent to make claims on your uninsured deposits. The amount of uninsured deposits you may receive, if any, will be based on the sale of the failed bank’s assets. As assets are sold, uninsured depositors receive periodic payment on their uninsured deposit claims. Although this is better than receiving nothing for your uninsured balances, the process can take years. In specific circumstances, the FDIC, can, and has, offered expedited payments, but they’re not required to do so.

1. The temporary increase of FDIC insurance coverage to $250,000 for all insurable capacities has been extended through December 31, 2013. If not further extended, FDIC coverage will revert to $100,000 on January 1, 2014 for all insurable capacities except IRAs and certain other self-directed retirement accounts and plans. Unless the increased coverage is extended, deposit insurance coverage for CDs with a maturity date after December 31, 2013 will revert to the prior FDIC coverage on January 1, 2014, regardless of when you purchased the CD. You should not rely on a possible extension of this increased coverage when purchasing CDs.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized advice. The strategies mentioned here may not be suitable for everyone. Each investor needs to review their portfolio strategy carefully for his or her own particular situation before making any decisions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Please be sure to research this information further before making any decisions as the rules and restrictions described are subject to change in reaction to shifting market conditions.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. Brokerage products offered by Charles Schwab & Co., Inc., are not FDIC insured, are not deposits or guaranteed obligations of a bank, and are subject to investment risk.

(0609-9060)

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