Deposit Insurance: Recession-proof your savings

If you’ve been following the news on the recession then you’ve probably noticed that economists have stopped arguing about when a recession might occur. Now their heated discussions are centered on when it actually started, November or December 2007. Even still, by definition the economy hasn’t reached a recession yet which means there’s still time to make preparations. A good place to start is by making sure your deposits are insured by your bank.

Having been in the financial industry for many years, I get all sorts of questions about deposit insurance. The questions seem to be coming more frequently as of late, so I thought it a good time to go over deposit insurance and how you can maximize your coverage with your financial institution.

As far as insurance coverage is concerned, the limits and regulations are the same for FDIC and NCUA, so whether you bank at a credit union or a bank, as long as they are covered by one of these two insurance depositories, then your money is covered up to the designated limit. One of the biggest misconceptions that I’ve run into is that people believe they have $100,000 in coverage and that’s it. Anything else needs to be moved to another institution. While I’m all for diversifying your assets, I’ve got clients with seven or more banks/credit unions. That seems crazy to me. How do you keep up with that many accounts? It’s stressful and largely unnecessary.

Deposit insurance is by account styling and so it is possible to protect more than a flat $100,000. The most common ownership categories are: single, joint, IRA, and beneficiary accounts.

Single

These are the accounts held solely in one person’s name. Deposit insurance is determined by the aggregate balance of all single accounts held at the same bank. So, for example, if Joe Smith had three single accounts with $25,000 in each account the sum of those three accounts would be $75,000. His insured amount is $100,000 for him alone, so all of his funds would be insured.

Joint

These are the accounts held by two or more parties. As with the single accounts, deposit insurance is determined by the aggregate balance of all joint accounts held at the same bank. However, each owner of the joint account is entitled to $100,000 insurance for their shares in the account. Let’s say Joe Smith is married to Anna Smith and they have two joint accounts with $110,000 in each account. The sum of those two accounts would be $220,000. Both Joe and Anna are entitled to $100,000 EACH, so the total insured amount is $200,000 leaving $20,000 uninsured.

Well, if the bank/credit union Joe and Anna bank with ever went under, they would lose $20,000. But, there’s no need to take that money somewhere else. Let’s look back at Joe’s single accounts for a moment. He still has $25,000 that can be insured in his single accounts. So, if we move the $20,000 over to his single accounts, Joe and Anna have $295,000 completely insured.

IRA

The good news with IRA’s and other qualifying retirement accounts is that recent legislation has increased FDIC and NCUA insurance on these accounts to $250,000. Contribution limits still apply, but if you’ve accumulated quite a bit of wealth in these retirement accounts, the government is stating that it will be protected - up to $250,000, of course. These work the same as single and joint with regard to aggregate funds. If you have both a Roth and a Traditional IRA, they are added together for the purposes of deposit insurance.

Beneficiaries

These can be a little more complicated simply because people are less familiar with how they work; however, beneficiaries can really help you maximize your insurance protection. Let’s go back to our example of Joe and Anna Smith. Let’s say they have two CD’s maturing from XYZ bank totaling $600,000 and they want to bring them over to their credit union, but they’re concerned about insurance. In our examples above, we saw how it was possible to insure their $295,000 at the same institution, so let’s see how we can insure this new money.

After talking to Joe and Anna, we learn that they have two kids. So, if Joe sets up a single account with POD (payable upon death) to Anna and then a second one with POD to his two kids, Joe has just secured an additional $300,000 in coverage. If Anna does the same with Joe and then a second one with her two kids, she also has $300,000 insured and that covers the $600,000 they brought over.

Depository insurance guidelines state that each beneficiary in a beneficiary account is entitled to $100,000 insurance. This DOES NOT include the owner of the account. They are insured separately under single accounts. So, if each beneficiary is insured up to $100,000 then in our example with Joe, his wife counts as one ($100,000 for her) and his two kids count as two ($100,000 to each of them) so that totals $300,000. The same holds true for Anna’s accounts. And now, Joe and Anna have $895,000 with their financial institution and ALL of it is federally insured.

As you can see, there are ways to protect your money and not have to run all over town to do it. This doesn’t mean that you have to consolidate everything into one place if you don’t want to. I have two financial institutions - a credit union, for which I work, and a regular bank. I highly recommend that at least one of your financial institutions be a credit union because they offer great rates in comparison to most banks. But, if you’re the one that has seven different banks because of depository insurance, then you can see it is possible to consolidate some of that. Talk to a professional at your local bank or credit union and get that set up. More importantly, if you haven’t looked at your insurance coverage with your bank or credit union, then now’s the time to do it. There’s nothing wrong with being careful with the money you’ve worked hard to earn!

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