Insurance covers your bank funds
By: Amos Goodall, Jr.
In this uncertain financial market, folks are worrying about their savings. Our local banks are probably not in trouble. Most have not engaged in risky credit transactions. Nevertheless, readers may want to check on their banks through rating services like www.bankrate.com. The site rates banks on a one-to-five-star rating. Most, if not all of the others, have four stars, which is defined as "sound."
Even highly rated banks can fail, so the Federal Deposit Insurance Corp. offers protection. Since its founding in 1933, no depositor has lost a penny of insured deposits. The FDIC does not insure stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if they were purchased through a bank. Coverage is limited to checking, NOW and savings accounts, money market deposits and certificates of deposit up to the deposit limit. Brokers and others have their own insurance which may cover some of these other investments.
What are the limits of this protection? It was recently raised to $250,000, temporarily through 2009, but expected to be made permanent. The basic rule is that this insurance covers a depositor up to $250,000 in a bank. If deposit accounts are owned equally by two or more people, they are each deemed to own an equal portion of the account. Each person's shares of all accounts at the same bank are added together, and the total is insured up to $250,000. Thus, if John and Mary jointly own a $520,000 certificate of deposit, they are insured up to $500,000.
Recently, the FDIC adopted new rules for with it calls "Revocable Trust Accounts." These accounts are either "Payble on Death" accounts or living trusts. Many lawyers have concerns about these, thinking that they can sometimes thwart estate plans, and living trusts are often over-sold to consumers based on horror stories about probate in other states inapplicable to Pennsylvania. The attorney general is prosecuting several trust mill establishments he thinks have marketed living trust packages using sales techniques he finds violate consumer protection laws.
Funds in trust accounts are insured to a greater degree. The FDIC looks at the number of beneficiaries (people receiving the money upon the depositor's death) to determine the number of units of insurance that are applicable. Thus, while the depositor is the insured party, coverage is provided for the interests of each beneficiary. The FDIC insures the interests of each beneficiary up to $250,000, as long as the account title indicates the existence of a trust relationship and each beneficiary of a POD account is named. If John has a $250,000 POD account with Mary as beneficiary, mary has a $250,000 POD account with John as beneficiary, and they jointly have a $1.5 million POD account for their three children, the entire $2 million is insured.
Under the new interim rule, an accoutn owner with up to five beneficiaries named in all revocable trust accounts at one FDIC institution will be insured up to $1.25 million. More than five different beneficiaries named will be insured for the greater of $1.25 million or the aggregate amount of all the beneficiaries' interests, limited to $250,000 per beneficiary.
If this isn't enough, one method is to keep accounts just below the limit at several different banks. A number of banks have gotten together to make this easier.
The Certificate of Deposit Account Registry Service, allows depositors to enjoy full FDIC insurance on accounts with up to $50 million. See www.cdars.com/index.phd. Participating banks accept large CDs and redeposit some funds in the name of the depositor in other participating banks. Because the FDIC insurance limit is allocated per institution, it is possible to use a number of banks' ceilings for a customer. At least two local banks participate in CDARS. The interest rate is set locally so the depositor gets the expected rate and receives one statement every reporting period, although funds may be at many banks.
For more information, contact your banker or financial adviser. Also, many investment advisors can arrange for a portfolio of insured CDs.