How to Protect Your Money From Bank Failure

During the turmoil in the financial markets last week, many people were asking if their personal bank accounts were safe - how high is the dollar coverage of the FDIC Insurance?

Here are some guidelines. Things are changing and the day is probably coming that FDIC coverage will be based on the total amount of deposits under one Social Security Number. Always check with your bank to confirm following:

For Individual Accounts, a total of $100,000, per institution is insured by the FDIC. This means that if you have a CD for $100,000 at Bank #1, you could also have a CD for $100,000 at Bank #2. Both would be covered. In this sense, you have coverage of up to $100,000 per institution.

For Retirement Accounts, such as IRAs, Roth IRAs, and other retirement plans, up to $250,000 is covered by FDIC insurance. This means that in addition to having $100,000 in personal (non-retirement funds),
you could also have up to an additional $250,000 in an IRA. BOTH would be covered by FDIC insurance.

For Joint accounts, which are owned by more than one person, are covered at $100,000 per owner. "Owner" means that each has equal withdrawal privileges. For example, an account you jointly open with a spouse is covered for up to $200,000. Obviously, you must fully trust the other person who will have full access to the account.

There are several lesser known ways of extending the FDIC Insurance...

First, POD Accounts. POD stands for Payable on Death. Your bank can help you set up a POD Account. This is done by adding a beneficiary to the account. That beneficiary designation can be changed at any time until your death. Once you die, the money belongs to the person listed on the account. Be sure to check with your estate planning attorney to ensure this will not conflict with the terms of your estate plan.

You can have a number of POD accounts, each with a different beneficiary and
each account would have FDIC insurance coverage, up to $100,000 each.

[Important Note: As of 9/26/08, the FDIC has loosened the rules as to who is a qualified beneficiary for a POD. You can read more detail here - FDIC INSURANCE COVERAGE

Finally, there are now sevices that spread your money to different banks in order to stay below the $100,000 level.

Some brokerage accounts can provide this service. It is not free, but is a balance between convenience and rate of return. Depending on how much cash you hold in banks, it may be well worth it.

A new alternative is CDARS - Certificate of Deposit Account Registry Service. It too, will allocate your funds between as many banks as it takes to stay within the FDIC insurance limits - up to $50 million. CDARS is run by Promontory Interfinancial Network, LLC in Arlington, VA. You can visit their website at https://www.cdars.com/index.php

How Stable is Your Bank or Credit Union?

Here are two quick online resources you can use to protect yourself from bank failure:

1. Bankrate.com -- Safe & Sound (tm): Free rating system for banks, thrifts, credit unions - This is a simple "star" system. The more stars, the better. Take a look at the financial strength of your bank, savings & loan or credit union now, to make sure it is strong.

2. FDIC: Electronic Deposit Insurance Estimator (EDIE) -- Online Version - An FDIC online calculator to see how much of your money is covered against bank failure. Make sure your money is all covered.