The Federal Deposit Insurance Corporation – The Guardian of Your Money
February 16, 2009 by MOYMJennifer
Filed under Savings
The ongoing global financial crisis which has seen several of the world’s largest banks and financial institutions (especially Lehman Brothers and AIG) declaring bankruptcy has been sending jitters through literally hundreds of thousands of depositors who are thinking, “if such big banks can collapse, what about our bank?” This leads to even more concerns. What happens if our neighborhood bank collapses? What will happen to the monies deposited there? Would it be safer to pull out my money now and keep it under my mattress?
Here’s the good news. The government – through the Federal Deposit Insurance Corporation or FDIC – provides insurance coverage of up to $250,000 for deposits in FDIC-insured banks or savings associations. In other words, your money is safe even if your neighborhood bank or savings association fails or is shut down; you can still withdraw your deposit after the FDIC works things out.
Here’s the bad news, though. If your deposits amount to more than $250,000, you will be somewhat out of luck. I say ‘somewhat’ because you can still claim and withdraw up to the maximum $250,000 insured amount. However, you cannot be assured of claiming anything beyond that $250,000.
Understanding FDIC
The FDIC was established in 1933 with a single overriding mandate – to ensure public confidence in the banking industry. This is achieved by providing all depositors in FDIC-insured banks with an insurance ‘coverage’ of $250,000; and second, by acting as the ‘receiver’ of failed or closed banks, taking over the task of collecting and selling the failed bank’s assets and using collected funds to settle the bank’s debts including claims for deposits in excess of the insured amount.
The interesting thing about the FDIC is that it is funded from premiums paid by insured banks as well as earnings from its investments in US Treasury securities; no federal or state taxes are used. The FDIC also prides itself on the fact that, throughout its 75-year history, no customer has ever lost a single penny of his or her insured deposits.
What is Safe?
There are a few things to keep in mind about FDIC, however, if customers want to maximize the protection that FDIC gives them.
For one, FDIC coverage does not extend to all financial institutions; it covers primarily banks and savings associations with depositors as the primary clientele. The next time you’re in the bank, look for the sticker or card with the FDIC logo there. That would be a good sign of coverage. You can also go to the FDIC website to see if your bank is insured. You can also simply ask your bank’s personnel outright.
Second, coverage is for deposits only. In other words, FDIC insurance does not extend to include investments made through the bank (including mutual funds, stocks or bonds) even if the bank itself is part of the FDIC-insured banks. Contents of safety deposit boxes, moreover, are also not covered.
Finally, insurance coverage is up to $250,000 only of the deposits within the insured bank. Keep in mind is that this is for individual deposit accounts only. Joint savings, partnerships or corporations are considered a single entity and as such are covered by the $250,000 limit. At the same time, keep in mind that FDIC coverage includes the bank’s branches – thus, opening accounts in different branches does not increase your insurance coverage. For example, if you have individual deposits of $100,000 in four different branches (or a total of $400,000) of one bank, your maximum coverage is still limited to $250,000.
Beyond the $250,000 Coverage
There are very specific instances when coverage beyond the $250,000 is allowed, mainly through establishing deposits under different ownership categories. One such ownership category are Revocable Trust Accounts, or deposit accounts for people with a stated intention that the accounts will be turned over to one or more beneficiaries upon the death of the original account holder.
For example, Mr. Smith sets up a “Payable on Death” deposit account of $500,000 which will go to his son and daughter upon his death. In the event of the bank’s failure, FDIC will release the full $500,000 since there are two beneficiaries named. If the POD is for a single beneficiary, however, the $250,000 insurance coverage will be applied, even if the total deposit is $500,000.
You can go to the FDIC website to find out more about specific exceptions.
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Not that I’m in this position, but what do you do if you have a couple of million in the bank? Are you just at risk of losing anything more than $250,000??!?
Many people break up their money and spread $250,000 across several different financial institutions. Keep in mind you can have $250,000 in savings account and $250,000 in a money market account and both would be covered at one bank.
Banks maybe insuring more money but customer service at my local bank has gone down while fees have gone up. I think they are cutting costs and charging more to pay for all their past mistakes. My bank has closed branches or reduced hours and have increased fees on ATM withdrawals at competitor’s banks.