IndyMac Lesson: Check for FDIC Insurance

Are your bank deposits insured?

If your account is under the $100,000 FDIC insurance limit, even headlines like the failure of IndyMac Bank, one of the largest bank failures in history, shouldn't make you lose any sleep. But if your deposits are above the $100,000-per-person insured limit, this latest bank failure should be a wake-up call.

America has $6.881 trillion dollars in deposit institutions, but only $4.241 trillion of those deposits are insured, according to the latest FDIC year-end statement. That leaves a staggering gap of more than $2.6 trillion sitting in uninsured bank accounts.

In the IndyMac takeover, it has been estimated that around $1 billion of deposits in the bank were uninsured, impacting 10,000 depositors.

Some of those depositors may have been lured to jumbo CDs because of above-market rates being offered by the struggling bank. That's a reminder of the old saying: "I'm not so concerned about the return on my money as I am about the return of my money!"

How FDIC Insurance Works

Now is the time to examine your bank accounts to make sure that you remain under the insurance limits, especially if you have multiple accounts in one bank. Here's how the insurance works, using excerpts from the FDIC Web site, where you can read the details.

Single Accounts: These are deposit accounts owned by one person and titled in that person's name only. All of your single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together and the total is insured up to $100,000.

Note: this category does not include retirement accounts, such as IRAs and Keogh accounts. Those accounts have a separate $250,000 insurance limit -- and that limit is based on the total of all retirement accounts for that person added together. (You cannot increase that insurance amount by adding different beneficiaries for the retirement accounts.)

Joint Accounts: These are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person's shares of all joint accounts at the same insured bank are added together, and the total is insured up to $100,000.

If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner's shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple's joint accounts.

Under FDIC rules, each person's share of each joint account is considered equal unless otherwise stated in the bank's records.

Revocable Living Trusts: These are formal revocable trusts created for estate planning purposes. The owner of a living trust controls the deposits in the trust during his or her lifetime.

Deposit insurance coverage for revocable trust accounts is based on each owner's trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account. The FDIC insures the interests of each beneficiary up to $100,000 for each owner, subject to certain restrictions on how the account is titled and who is named as beneficiary.

Coverage is provided for the interest of each qualifying beneficiary named by each owner. Additional coverage is not provided to the owners for naming themselves as owners.

Note: There are complex exceptions to this rule for certain trusts, so if you are planning to keep large amounts on deposit for a trust, you should speak with a bank officer to confirm your deposit insurance.

What Should You Do Now?

1. Make Sure Your Bank Accounts are Insured Deposits!
Banks offer many types of investments these days, and some of those look like insured deposits, but may not be. Now is the time to make sure that products purchased inside your bank are actually insured deposit accounts. Ask that question directly, and ask your banker to show you the language of your account agreement that confirms the deposit insurance.

2. Check Your Insurance Limits
If you have amounts above $100,000 in your bank, you may want to move money by wire transfer to another insured deposit institution. That could mean having the interest earned on your jumbo CD sent to you each month, instead of accruing to your account. Don't forget that balances in your checking account will be added to your other deposit accounts.

3. Use Alternative, Safe Investments
You can purchase Treasury bills, the world's safest and most liquid investments, directly from the government. The minimum investment is now only $100, but you can purchase much larger amounts, in effect getting the government's IOU for money that is far above the deposit insurance limits.

The process of buying Treasuries online is simple, and transactions are done by direct debit from your bank account. Interest is automatically paid out to your bank account. For larger investments, you can stagger maturity dates. Plan to hold those securities to maturity -- typically 13 or 26 weeks -- before getting access to your money by having it deposited to your bank account.

Bottom Line: You can sleep well with "money in the bank," but only if you know the FDIC-insurance status of those funds.

If you've been smart or lucky enough to accumulate savings above the insured limits, you should take the time to evaluate your banking situation and take appropriate steps to give your money maximum safety.

Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated. She was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. Savage currently serves as a director of the Chicago Mercantile Exchange Corp.

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