FDIC Insurance – How safe are your savings?

FDIC Insurance – How safe are your savings?

Imagine losing all of your hard-earned savings overnight. Sound like a nightmare? Unfortunately, this nightmare became reality for thousands of American families during the Great Depression.

After the stock market tumbled in October 1929, people began losing faith in the crumbling US financial system. Panicked consumers tried to withdraw their bank savings, putting another great strain on the banking sector. As a result, 650 banks failed in 1929, with the number rising to 1,300 the following year [1].

In reaction to this disastrous loss, in 1933 the US government established an independent agency called the Federal Deposit Insurance Corporation (FDIC) to ensure it never happened again.

What is FDIC Insurance?

FDIC insurance guarantees deposits at covered banks and other financial institutions. It covers $250,000 per depositor, per bank, for each type of account (such as individual, joint, trust, or IRA). For accounts with multiple beneficiaries (such as a trust or employee benefit plan), the limit is $250,000 for each beneficiary. Business accounts and irrevocable trusts, on the other hand, are limited to $250,000 for the entire entity [2].

What is covered?

FDIC covers most financial instruments offered through banks, such as checking and savings accounts, certificates of deposit (CDs), and money market deposit accounts.

What isn’t covered?

FDIC doesn’t cover any investments. This includes stocks, bonds, mutual funds, life insurance, and annuities. For these investments, other guarantees apply.

What happens if I’m over the coverage limit?

FDIC insurance will cover your accounts dollar-for-dollar up to the coverage limits. After that, however, any additional deposits may be at risk.

How can I get more protection?

If you have more than $250,000 of assets, you can increase your protection by spreading your cash across multiple institutions. Because FDIC insurance is per bank, you are essentially increasing the actual dollar amount of your coverage. Additionally, because you aren’t keeping all of your cash with one institution, you are protecting yourself against the risk that any particular bank will start facing financial trouble. Your bank may also provide a program that allocates your deposit across multiple institutions to save you the hassle of multiple banking relationships.

Alternatively, you could hold assets in multiple registrations.  The limit on FDIC insurance applies for each type of account.  If you have $500,000 to save, you could keep half in your name and the other half in a joint account with your spouse. Have a revocable trust? Each unique trust beneficiary receives a full $250,000 of coverage. For example, a couple with their three children as beneficiaries could receive a full $750,000 of protection.

Another solution is to invest excess funds outside of a bank.  For example, if you have $1M in bank CDs, you could keep $250,000 in CDs, invest $500,000 at a brokerage firm and use the remainder to purchase an annuity contract.

[1] http://www.history.com/topics/bank-run

[2] https://www.fdic.gov/deposit/deposits/brochures/deposit_insurance_at_a_glance-english.html

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