Banking Your Money

Make sure your bank accounts are protected.

For most of us, the return we get on our money is important, but not as important as being assured of the return of our money. To help protect customers at financial institutions, the federal government provides insurance protection. If the bank, savings or loan or credit union where you deposit your money is protected by this insurance, you are entitled to receive all of your money back, provided your accounts don't exceed the limits of the insurance. (For convenience sake, we will use the term "bank" to describe any of the above institutions in this chapter, unless the information pertains specifically to a savings and loan or credit union.)

Depositors at banks and savings and loans are insured by the Federal Deposit Insurance Corporation, commonly referred to as the FDIC. Credit union members are insured by the National Credit Union Share Insurance Fund. To obtain federal insurance coverage, financial institutions are expected to meet certain minimum financial requirements and pay a fee for the insurance.

Currently, federal insurance protects depositors up to a maximum of $100,000. Contrary to what some people believe, note that the coverage is for a total of $100,000 per depositor, not $100,000 per account. If, for example, you have $10,000 in a checking account and another $100,000 on deposit in passbook savings and certificates of deposit at the same bank, your total protection is limited to $100,000, which means you may not get the additional $10,000 back if the bank should fail. Even if you opened the accounts at separate branches, it's all considered subject to the $100,000 limitation, since a branch can't fail unless the entire bank goes under.

There are some ways to have more than $100,000 on deposit at a single financial institution and have the entire amount receive complete federal insurance coverage. For example, a married couple could have $100,000 in separate accounts held in each spouse's name and an additional joint account with another $100,000. In this scenario, all $300,000 would be covered by federal deposit insurance. Trust accounts you set up for your spouse, a child or a grandchild are also covered up to $100,000, regardless of the amount you have deposited in other accounts at the same bank. But if you set up a trust for a parent or anyone other than a spouse, child, or grandchild, the trust account's balance is combined with your other accounts when determining FDIC coverage.

Since December of 1993, the rules regarding coverage of IRA and Keogh accounts have changed. Before the change, IRAs and Keoghs each were eligible for full coverage of up to $100,000. After the change, these accounts are now lumped together and entitled to a total of $100,000 in coverage. So if you have $80,000 in a Keogh and another $40,000 in an IRA at the same bank, only $100,000 of the total will be covered by FDIC insurance, leaving you with a potential loss of $20,000 if the bank should fail.

For most people, $100,000 of federal deposit insurance is more than adequate. But if you do have more than $100,000, it's probably best to simply open another account at another federally insured bank in which to deposit the excess.

Unless you are willing to risk losing all your money, stay away from any financial institution that hasn't obtained federal deposit insurance coverage, even if it claims its depositors' funds are privately insured, or insured by a state government fund. One of the great tragedies of the 1980s and early 1990s was the failure of a number of institutions which lacked FDIC coverage. In some cases, depositors at these banks were left waiting for months and even years before receiving only a small amount of the money they had placed on deposit; in other cases, they received nothing at all. Although more and more financial institutions have joined the federal deposit insurance system, there are still some that haven't, usually because they can't qualify for coverage. This may be especially true for so-called Internet banks, which may consist of little more than a website and a scam artist running it. To attract customers, these institutions usually advertise that they pay a much higher interest rate on accounts than you can get at a federally insured bank. Unless you can get proof that a bank has federal deposit insurance, our advice is to steer clear of it entirely.

One final tip: mutual funds which you purchase through your bank are not considered bank accounts for the purpose of receiving FDIC coverage. And stocks and other investments sold through your banks brokerage arm aren't covered, either.