FDIC insurance protects your money (except when …)

Editor’s Note: On Oct. 3, 2008, Congress raised the FDIC insurance amount to $250,000. This change will be in effect until Dec. 31, 2013.

A few years ago, you probably never gave the FDIC, or the deposit insurance it provides, a second thought. But with banks falling like dominos and struggling financial institutions of all stripes in the news, you’re probably wondering if there are exceptions to the FDIC’s $250,000 guarantee.

It is almost always there for you. But understanding FDIC rules is worth the effort, because almost is the operative word here.

Uncle Sam practices prevention

The Federal Deposit Insurance Corp. was created in 1933 by President Franklin D. Roosevelt to insure bank and thrift deposits after people lost their money in the aftermath of the stock market crash of 1929. Deposits at credit unions are insured by the National Credit Union Administration. The agencies insure accounts up to $250,000.

“The lessons of the Depression prompted the government to act quickly to protect bank customers from disasters beyond their control,” says Kathleen Nagle, associate director for consumer protection at the FDIC.

But a government’s work is never done. People were confused about coverage limits on joint accounts — which seemed to be half of those on individual accounts — and frequently complained to the FDIC. So in 1999, the FDIC ruled that all cash in a joint account is insured on a per-person basis up to $100,000. If Joe and Jane Depositor have $200,000 in a joint checking account, the total insurance coverage is $200,000. (In October 2008, the insured amount per individual per account was raised to $250,000.)

To insure any more, the Depositors would have to find a new bank for the overflow.

Rules for CDs when banks merge

The rules for certificates of deposit depend on the maturity and term at the time of the merger:

  • CDs assumed by another institution continue to be separately insured until the earliest maturity date after the end of the six-month period.
  • CDs that mature during the six-month period and are renewed for the same term and in the same dollar amount (either with or without accrued interest) will continue to be separately insured until the first maturity date after the six-month period.
  • CDs that mature during the six-month period and are renewed on any other basis, or that are not renewed and cashed in, will be separately insured only until the end of the six-month period.
What is insured by the FDIC?
  • Savings deposits
  • Checking deposits
  • Deposits in NOW accounts
  • Christmas club accounts
  • Certificates of deposit
  • Cashiers’ checks
  • Officers’ checks
  • Expense checks
  • Loan disbursement checks
  • Interest checks
  • Outstanding drafts
  • Negotiable instruments and money orders drawn on the institution
  • Certified checks, letters of credit and travelers’ checks, for which an insured depository institution is primarily liable, also are insured when issued in exchange for money or its equivalent, or for a charge against a deposit account
What is not insured by the FDIC?
  • Contents in a safe-deposit box
  • Money market mutual funds
  • Annuities
  • Stocks
  • Bonds
  • Treasury securities
  • Any investment product whether purchased through a bank or a broker/dealer

Some states require that all institutions that accept deposits carry federal deposit insurance. All federally insured banks and savings and loans must prominently display the FDIC seal.

The agency insures the principal and balance on deposit accounts — such as checking, savings and money market accounts — up to $250,000. Certificates of deposit and trust accounts that contain cash rather than securities are also protected.

So if Joe Account Holder had a principal balance of $95,000 in his checking or money market account plus $4,000 in interest, the total amount would be insured by the agency. If Joe’s cash including interest exceeded $250,000 and his bank failed, he would only have the maximum insurance coverage of $250,000.

Protecting retirement savings

But what about retirement accounts? Are they backed by the guarantee of the government? The answer is, sort of.

Under FDIC rules, bank deposits in self-directed 401(k)s and Keogh plans, Roth IRAs, SEP IRAs and SIMPLE IRAs that are owned by the same person are covered up to a combined total of $250,000.

Limits get a bit complex with employer-directed 401(k), employer-directed Keogh, pension or profit-sharing plans, but in general, money that is allocated to bank deposits in individual employees’ accounts is insured up to $100,000. This is referred to by the FDIC as “pass-through” coverage.

It’s important to understand that FDIC protection only applies to bank deposits in these retirement accounts. Investments such as stocks, bonds, mutual funds, ETFs and annuities that are sitting in these accounts are not covered. For example, if Joe Depositor has a 401(k) through his employer with a balance of $40,000, and 25 percent is allocated toward bank deposits, then $10,000 of Joe’s 401(k) would be FDIC insured.

Who’s covered and for how much?

  • For individuals: Each bank and thrift customer’s deposits are insured up to $250,000. That includes checking, savings, money market accounts, certificates of deposit and individual retirement accounts.
  • For couples: All cash in a joint account is insured on a per-person basis up to $250,000. So Joe and Jane Depositor can have up to $500,000 in a checking account that would be fully FDIC insured.
  • For beneficiaries: Individuals or couples can set up trust accounts for their children or certain other family members for a maximum of $250,00 in insurance coverage per owner and beneficiary. So if Joe and Jane have payable on death accounts for their three children, up to $750,000 in the accounts is FDIC insured (2 account holders x 3 beneficiaries x $250,000 in coverage = $750,000). The coverage can also apply to the spouse, parent, grandchild or sibling of the account holder.

The FDIC offers the Electronic Deposit Insurance Estimator, which tells customers if their accounts at an FDIC-insured institution are within the $250,000?

The money paid out to make account holders whole when banks fail comes from the FDIC deposit insurance fund, or DIF. That fund currently totals $52 billion, says Lajuan Williams-Dickerson, an FDIC spokeswoman. Meanwhile, total FDIC-insured deposits ring in at around $4.5 trillion. So, if the DIF stands at a little over 1 percent of the total deposits it covers, how can we be sure it won’t run out if there’s a cascade of bank failures?

“We don’t anticipate that there will be enough bank failures to deplete the $52 billion fund,” says Williams-Dickerson.

But even if there was, Nagel says, “The FDIC has a $30 billion line of credit that they could draw on from the Department of the Treasury.” And failing that, Nagel says, “the U.S. Congress has said that the FDIC is backed by the full faith and credit of the U.S. government.”

So even if the FDIC’s funds are overwhelmed by a flood of bank failures, the federal government would be there to make sure depositors got their insured funds back.

What happens if you’re not covered?

All this federal protection is moot if your deposits aren’t covered by the FDIC. If you have an account that exceeds FDIC limits and the bank goes under, you’ll get access to the first $250,000 almost immediately. For the rest, though, you’ll have to wait until the failed banks assets are sold off by the FDIC. And if the sale of the bank’s assets doesn’t yield enough cash to pay off depositors?

“There’s no guarantee that they’ll get 100 cents on the dollar,” says Williams-Dickerson.

In fact, the average return for uninsured deposits is 72 cents on the dollar. And if your bank is caught up in the wealth-destroying subprime mortgage meltdown, you may get much less.

And of course, if you bank at an instituition that is not FDIC-insured, all bets are off. You can be sure a bank is properly insured by doing a search on the FDIC Web site.