After all this time, you’d think most people would have an accurate handle on how their bank savings accounts are–or are not–protected by federal insurance.
Not so.
Truth is, there are still a slew of misunderstandings and misconceptions about the security provided by the Federal Despoit Insurance Corp., ranging from exactly how much of your deposits and interest earnings are covered to the conditions under which they’re covered.
Should you worry about losing money at any institution that has an FDIC label on its front door? No, because banks today are supersound; there hasn’t been a failure in 14 months. The industry keeps pounding out record profits thanks to the low rates they pay you on savings, the high rates they charge you on loans and all the new fees that keep hitting your wallet.
The confusion centers on the following, according to the FDIC:
– What federal deposit insurance covers. Recently, I came across a financially smart person who mistakenly advised his colleagues that if a bank failed only the depositor’s principal was protected up to $100,000, but the interest was not. That’s 100 percent wrong. FDIC insurance works on the “Rule of 1’s”: It covers one individual at one institution for up to $100,000, including principal and interest. But there’s a way to get more protection, as you’re about to find out.
Some folks argue that protection of interest earnings depends on how the account is compounded–daily, monthly, quarterly and so on–and when the interest is paid. In other words, they claim that if your investment is compounded daily but credited to your account quarterly, but not yet paid, you don’t collect the interest if the bank goes belly-up in the meantime.
Untrue, says David Barr, public affairs specialist for the FDIC. If a failed bank is taken over by the government, the FDIC calculates your interest up to the day the outfit goes kaput, and posts the money to your account.
– Some folks go astray with the “per-person-per-institution” part of the FDIC coverage language. They believe the maximum $100,000 protection applies to the individual’s total investments regardless of how many different institutions they keep their money in. That’s also wrong, because the key here is the “per-institution” wording.
You can deposit $100,000 at several different, separately chartered banks, with each deposit being fully FDIC-insured. But if you plunk down 100 grand at each of several different branches of the same bank, a total of only $100K is covered.
– Brokers who sell bank CDs can divide up a large investment among several institutions to protect up to $100,000 at each one. Say you’re lucky enough to have $1 million to invest. The broker can channel your money to 10 or more different banks to bring each investment within the FDIC coverage.
However, FDIC’s Barr points out that by law undercapitalized institutions are prohibited from accepting brokered deposits unless they receive a waiver from the FDIC. The government also has interest rate limits on brokered funds, so be sure to ask your broker about this.
Should you always invest the exact $100,000-insurance limit? Probably never, because you should also factor in your projected interest earnings on the account. If, for example, you invest $100,000 in a one-year CD yielding 6 percent, the $6,000 in interest will not be insured because you’re past the FDIC limit. Better you invest only $93,000 at the same bank and have both principal and interest covered.
– It’s possible for a family of four to insure up to $1.4 million of FDIC-protected deposits at the same institution. It can be done through a combination of individual accounts, joint accounts and something called revocable testamentary trusts. Here’s how it works:
1. Individual accounts. The husband, wife and each of two children separately open $100,000 FDIC-insured accounts. That comes to a total of $400,000 in FDIC protection.
2. Joint accounts. Two names appear on each of four $100,000 accounts, with $50,000 of FDIC coverage per person per account, as follows: husband and wife, husband and child number one, wife and child number two, and only the two kids on the fourth account. That way, the insurance coverage for each family member adds up to $100,000, or a total of another $400,000.
3. Trust accounts. This plan involves six unique account combinations of $100,000 for one trustee and one beneficiary named for each account: husband for wife, wife for husband, husband for the first child, husband for the second child, wife for the first child and wife for the second child. Total FDIC insurance: $600,000.
And no, bank mutual funds aren’t protected.
Got a question about how federal insurance protection works? Call toll-free 800-934-FDIC and hold for a live specialist.
– Latest rate trend: Rates are sliding faster on CDs, while mortgages rebounded upward to 7.34 percent on 30-year fixed rates in Bank Rate Monitor’s latest poll.
