FDIC
Insurance Overview
FDIC covers deposit accounts, dollar for
dollar, including principal and any accrued
interest, up to the insurance limit. FDIC is
funded by premiums paid by financial
institutions and in 2007 had $51 billion
covering $3 trillion of insured deposits.
Historically, insured funds are available to
depositors within days after the closing of an
insured bank. Since the start of the FDIC in
1934, no depositor has
ever lost a penny of insured deposits.
The FDIC web site is
www.fdic.gov
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( Click the links
below to jump to the different
sections on this webpage. )
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Let’s begin by saying what FDIC does not cover.
FDIC does not cover money placed in stocks, bonds,
mutual funds, life insurance, annuities, U.S. Treasury
obligations, or uninsured bank deposits. FDIC does cover
up to $250,000 in deposits for one owner at one insured
bank, but there are different categories of owners that
may allow one to increase coverage.
Permanent
Increase In FDIC Coverage to $250,000
The Dodd-Frank
Wall Street Reform and Consumer Protection Act
signed by the President 21 July 2010, raised the
standard maximum deposit insurance amount to
$250,000. This makes permanent the temporary
increase that was to expire 31 December 2013.
The FDIC insurance coverage limit applies per
depositor, per insured depository institution
for each account ownership category.
This means if the combined checking, savings,
money market accounts and CDs for a single owner
at one bank total $250,000 or less all deposits
are insured; joint accounts would be covered for
up to $500,000 (IRAs were already protected up
to $250,000). The FDIC coverage is per bank,
meaning if one owner has $250,000 deposited at
ten different banks all deposits would be
covered. Naturally, people should talk to their
banker to ensure they are fully insured in their
own situation.
Accounts owned by one person and titled only in that
person’s name are single accounts. If Jack has a
checking account, savings account and a CD at the same
bank titled only in his name, all of these accounts are
added together and insured up to $250,000.
- What if Jack had $100,000 in his
checking account and another $200,000 in CDs at the
bank?
Assuming both accounts
were owned and titled by only Jack, $50,000 of the total
would be uninsured deposits because the total ($300,000)
is $50,000 over the $250,000 FDIC insurance limit.
- What if Jack had $100,000 in his
checking account at one bank and $200,000 in CDs at
another bank?
Both accounts are covered
because FDIC provides $250,000 of coverage for each
bank.
- What if Jack had $100,000 in his
checking account and another $200,000 in his IRA at the
bank?
Both accounts are covered
because Self-Directed Retirement Accounts (IRAs
and SEPs) are treated as separate titled accounts and
FDIC provides $250,000 of coverage for Jack's checking
account and $250,000 for Jack's IRA.
- What if Jack had $100,000 in an
old IRA and another
$100,000 in a SEP at the same bank?
It appears both would be covered because both are
IRAs and the total is less than $250,000.
Joint Accounts
Each person’s share of each joint account, with the same
or different co-owners at the same insured bank, is
added together and the total is insured up to $250,000.
If Jack and Carol had $200,000 in their joint checking
account and $200,000 in joint owned and titled CDs, all
at one bank, all $400,000 would be insured because the
total of their individual shares was not greater then
$500,000.
Revocable Trust Accounts
There can either be payable-on-death (POD) accounts
or estate planning trusts (living trust, family trusts)
whereby, if certain conditions are met, the accounts are
insured up to $100,000 for each owner for each
qualifying beneficiary. Qualifying beneficiaries are the
owner’s spouse and (either natural or adopted or step)
child, grandchild, parent, sibling.
Note:
There are different ways to maximize FDIC coverage and
the place to ask questions is at the bank. This summary
is only for educational purposes and is not intended as
legal advice.
Insuring More Than $250,000
FDIC coverage is limited to $250,000 at each
bank per named single nonqualified account. So,
typically an individual with $1 million in CDs would
either need to go insurance-naked on $750,000 or open
accounts at four different banks. But now ONE bank
account can provide FDIC coverage on the whole million
if the bank uses CDARS.
Who is
CDARS?
The
Certificate of Deposit Account Registry Service, or
CDARS, uses a network of banks across the country to
provide the additional FDIC coverage needed.
But all of
this is done behind the curtain. What the depositor
sees is one account at their bank with one account
number and the depositor gets one Form 1099-INT for
interest at tax time. Using CDARS as much as $50 million
can be covered.
The program is managed by Promontory Interfinancial
Network, LLC. [1515 North Courthouse Road, Suite 800,
Arlington,VA 22201, 866-776-6426]. Although they have
only been around a few years they boast a heavyweight
board and management team that includes as their CEO
former Comptroller of the Currency Eugene Ludwig.
How does it
work?
The way it works is every dollar over the $250,000
coverage limit is placed in another bank and that bank
deposits an equal amount of money in the first bank. So,
if a consumer had $300,000 the first bank might retain
$240,000 (to keep under the $250,000 limit after earning
next year's interest) and put the remaining $60,000 in
the second bank. Since the consumer now has less than
$250,000 at each bank the entire $300,000 is FDIC
insured. The second bank would then deposit $60,000 from
a different customer's account back to the first bank to
balance up the books. If the consumer had $600,000 three
banks would be used, and that individual with $1 million
would have their money on deposit at five different
banks.
What's the
catch?
The catch is the bank will take a little more off the
yield paid to the consumer to cover the extra costs of
the CDARS program. However, because of the national
network of over 600 banks used the consumer could still
wind up earning more with CDARS than if they left all
the money in their local bank.
Another point
is CDARS network banks tend to be small or medium sized
financial institutions, the vast majority of the banks
are not affiliated. But it might get your banker's
attention if you threaten to withdraw your "mega CD"
unless they provide CDARS.
CDARS had been
endorsed by American Bankers Association. More
information is available at their web site
www.cdars.com
The bank customer will
usually find out their bank failed when they get a
letter stating that another bank has taken over the
accounts. FDIC does not give advance notice to the
public when a financial institution is closed. If all of
the accounts are fully FDIC insured the bank customer
loses nothing and access to all money is usually
immediate. If you have uninsured deposits, life is more
difficult.
When a
bank fails and FDIC is appointed as receiver, FDIC will
sell the institution’s assets to pay depositors and
creditors. If any excess cash is generated – after the
administrative expenses of the FDIC receiver are taken
care of – then the receiver may declare and distribute a
dividend to claimants. First in line to claim any money
are the remaining uninsured deposits, followed by
institution liabilities, subordinated obligations, and
then obligations to shareholders.
When Do Uninsured Depositors Get Paid?
Uninsured depositors
may get a special Advance Dividend
usually
within 30 days after the bank closes. Every quarter
FDIC, as the receiver, will determine the net proceeds
available from converting failed bank assets and, if
money’s available, pay out a Traditional Dividend
until all the money’s gone.
Could you be more
specific?
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The
remaining eighteen banks that went under had returned,
by the spring of 2005, anywhere between 30% and 98% of
uninsured deposits, but they are still in receivership
and could return more (but it could take years).
List Of Banks In Receivership
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Failed Bank
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Date Closed
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Total Uninsured Deposits
Repaid
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Bank of Sierra Blanca
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18 January 2002
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65.35%
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Sinclair National Bank
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7 September 2001
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82.17%
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The Malta National Bank
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3 May 2001
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91.21%
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First Alliance Bank & Trust
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2 February 2001
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94.99%
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Have Uninsured Depositors Always
Received All Their Money Back?
No. For example, from 2001
through 2004 22 banks were taken over by FDIC and four
of these banks failed to return 100 cents on the dollar
on uninsured accounts when the final dividend was paid.
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