Education >> Financial Basics

Is Money in the Bank Still Safe?

October 07, 2008

A deposit insurance primer

The federal government recently increased deposit insurance to $250,000 per account. Read on to learn more about how your bank, credit union and brokerage accounts are insured.

Talk of potential bank failures and the image of depositors lining up outside now-defunct IndyMac Bank have reignited interest in deposit insurance. People want to know what will happen to their money if their bank, credit union or brokerage firm fails. Before you stash your cash under a mattress, let’s review the basics.

For starters, it’s important to recognize that banks are still a safe place to keep your money. Although the Federal Deposit Insurance Corporation has listed 117 banks on its “problem list,” few are actually expected to fail. And that’s out of the 8,500 banks that FDIC insures. (So far this year, only around 12 banks have failed -- compare this to the 834 banks that failed during the recession of 1990-1992.)

Deposit Insurance. Bank deposits are protected by FDIC, while credit unions are protected by the National Credit Union Administration. Chartered by Congress, these two entities are private insurance companies that receive no federal funding. Rather, banks and credit unions pay insurance premiums, much as you pay premiums to your auto insurer. Should a bank fail, it files a claim with FDIC or NCUA. Customers and members typically receive access to their insured deposits within a few days.

To find out whether your bank or credit union has FDIC or NCUA insurance coverage, visit www.fdic.gov or www.ncua.gov. To estimate how much of your money is insured, use the FDIC Electronic Deposit Insurance Estimator (www.fdic.gov/edie/) or the NCUA Share Insurance Estimator (webapps.ncua.gov/ins).

FDIC and NCUA insure deposits in a similar fashion:

Single Accounts: $250,000. All account balances in a single name at the same bank are added together and insured for up to $250,000.

IRA, SEP, 457, Keogh and Self-Directed 401(k): All self-directed retirement funds owned by the same person in the same bank are added together and insured for up to $250,000. It is possible for someone to have insurance for $250,000 covering regular accounts plus an additional $250,000 for self-directed accounts.

Joint Accounts: $250,000 for each co-owner. No owner can be a corporation, trust, estate or partnership. Each co-owner must have equal rights to withdraw funds from any account. At the same bank, each co-owner’s share in any account is added to the co-owner’s shares in other accounts to reach the $250,000 limit. Example: Mary and John have $50,000 in one account, Mary or John has $250,000 in one account, Mary or John or Robert has $375,000 in one account: Mary and John are each insured for $250,000; Robert is insured for $125,000.

Payable-on-Death Accounts: Each beneficiary is insured for $250,000. Beneficiaries must be identified by name and can be a person, charity or other non-profit organization.

Living/Family Trust Accounts: Such trust accounts are insured up to $250,000 per owner for each named beneficiary. FDIC assumes that beneficiary interests are equal unless stated otherwise in the trust. Example: Mary deposits $1 million in her family trust account naming her three children as beneficiaries. The account is insured for $750,000.

Brokerage Accounts. FDIC does not insure money you have invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if you bought these products from an insured institution. Although securities are never insured against loss in value, the Securities Investors Protection Corporation does offer protection if a brokerage firm or bank’s brokerage subsidiary fails. In that event, SIPC will replace securities valued up to $500,000, including up to $100,000 in cash. In addition to this coverage, accounts in the Edelman Managed Asset Program® are provided additional protection of up to $250 million per account by the brokerage firm holding the account.

Ultimate Protection: If none of this is placating you, consider U.S. Treasury bills. These securities enjoy the full faith and credit of the federal government and are widely considered the safest investment in the world. That’s because the federal government has never defaulted on any principal and interest payment in our more than 200-year history.

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