Most bank deposits are insured, but it's best to check
Federal Reserve Board Chairman Ben Bernanke unnerved the financial markets recently when he predicted that the economic downturn will lead to an increase in bank failures.
Does that mean you should withdraw your savings from your local bank and stash it in a coffee can?
That strategy might have made sense for your grandmother, but it's a bad idea today. Bank failures are still rare. And even in the unlikely event that your bank goes under, you won't lose any money as long as your deposits are insured. In most cases, you'll still have access to your insured deposits by the next business day, says Kathleen Nagle, associate director for consumer protection at the FDIC.
In testimony before the Senate Banking Committee, Bernanke said he believes large banks have the wherewithal to recover from the turmoil in the mortgage business. But some small banks that have invested heavily in real estate in areas where prices have fallen sharply are under serious pressure, he said.
In the past 12 months, only four banks failed, according to the Federal Deposit Insurance Corp. But at the end of the fourth quarter, 76 insured institutions were on the FDIC's "problem list," up from 65 at the end of the third quarter. Banks on the list are targeted for additional regulatory scrutiny, based on a rating system that gauges their financial strength.
The number of banks on the problem list is still low by historical standards, FDIC spokesman David Barr says. During the banking crisis of 1990, by contrast, 1,500 banks were on the list. The FDIC never identifies institutions on its problem list because it doesn't want to cause a run on the banks.
Protecting your money
FDIC insurance covers up to $100,000 in deposits, an amount that hasn't changed since 1980. Still, there are ways you can increase your coverage, including:
- Save in more than one bank. The $100,000 insurance cap covers the amount you have in each insured institution. If you have $100,000 in CDs in one bank, and $100,000 in another, unaffiliated bank, all your money is insured.
- Take advantage of higher limits for retirement accounts. If your individual retirement account is invested in CDs or other insured deposits, your savings will be protected for up to $250,000. That's in addition to other, non-retirement deposits you might have in the same bank.
But stocks, mutual funds, annuities and other types of investments that are acquired through IRAs aren't covered, even if you bought them from an FDIC-insured bank, Nagle says.
- Set up joint accounts. These accounts are treated separately under FDIC rules, allowing a couple to save an additional $200,000. If, for example, you and your spouse each has $100,000 deposited in a bank as individuals, you could also set up a joint account for $200,000, raising your total coverage to $400,000. To qualify, though, each account holder must have equal withdrawal rights. If one account holder needs the other's permission to take withdrawals, it's not considered a joint account for deposit insurance purposes.
The couple could each save an additional $100,000 by naming each other as the beneficiary in a payable-on-death account or a living trust - accounts created for estate-planning purposes.
Insurance pitfalls
Despite the widespread availability of deposit insurance, about 38 percent of the $6.9 trillion in bank deposits are uninsured, according to the FDIC. Some of these deposits belong to businesses that keep more than $100,000 in the bank to pay their bills. But other uninsured deposits belong to consumers who have inadvertently exceeded the limits.
For that reason, it's important to periodically review your accounts to make sure they're still fully covered. Events that could cause you to lose some of your insurance coverage include:
- Bank mergers. If you have insured deposits at two banks that merge, your combined accounts might exceed the insurance limit for a single institution. The FDIC will provide full coverage for the separate accounts for six months after the merger, or in the case of CDs, until maturity, Barr says. But after that, you'll need to make some adjustments, such as moving some of your money to an unaffiliated bank.
- Death of a spouse. If your spouse, or anyone with whom you have a joint account dies, you could lose some of your insurance coverage.
For example, if you have a joint account for $150,000 and your spouse dies, only $100,000 of your savings will be covered by deposit insurance. The FDIC gives survivors six months to restructure their accounts.
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