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FDIC Consumer News
Fall 2008 – Special Edition: Your New, Higher FDIC Insurance Coverage
Fact vs. Fiction: Common Misconceptions About FDIC Deposit Insurance
When a bank fails, insured deposits are completely safe. However, depositors often have misconceptions about how FDIC insurance works, some of which can inadvertently result in a portion of their money being over the federal limit and at risk of loss. To help you avoid repeating the mistakes of others, FDIC Consumer News has asked FDIC deposit insurance specialists about some of the most common misunderstandings – and tips for avoiding mistakes. (Our guidance also reflects the new, temporary increase in the basic FDIC insurance limit from at least $100,000 to at least $250,000, in effect through December 31, 2009, and described in our article on changes in FDIC coverage.)
Fact: You may be able to qualify for more than $250,000 in FDIC insurance coverage — $250,000 is NOT the maximum for one person.
Deposit insurance coverage is based on how much money you have in different "ownership categories" (single, joint, revocable trust, certain retirement accounts and so on) that are separately insured from each other at the same insured institution. And, under current law, each category is covered up to the basic limit of $250,000. So, if you have deposits in three different ownership categories at the same bank, you can qualify for up to $750,000 of insurance coverage — and sometimes more. Also, your deposit insurance coverage is separate from another depositor's insurance coverage, even if an account is jointly owned.
Example: Phil has $575,000 on deposit in a variety of accounts at one bank — $200,000 in various savings accounts (other than retirement accounts) in his name alone, several retirement accounts totaling $225,000, and $150,000 in joint accounts totaling $300,000 with his wife. (Each person's share of each joint account is considered equal unless otherwise stated in the bank's records.) Under current rules, with each category insured up to $250,000, all $575,000 would be fully insured. That coverage also would be separate from any deposits at another insured institution.
Fact: FDIC insurance coverage is based on the deposits a person holds in one bank — NOT how many accounts there are or the number of branches used.
Contrary to some misconceptions, dividing money into multiple accounts or taking it to different branches will not increase your insurance coverage beyond what each owner is entitled to in each category.
Example: John and Mary together have three certificates of deposit (CDs) at their bank totaling $520,000. They purchased one CD for $220,000 at a branch near where they live. They signed up for another CD with $200,000 at the bank's main office near where Mary works. The third CD, for $100,000, was obtained at a branch near where John works. Under the FDIC's rules, each person's shares of all joint accounts at the same bank are added together and the total is insured up to $250,000. In this case, John and Mary each own $260,000 in the joint account category, putting a total of $20,000 ($10,000 for each owner) over the insurance limit. The fact that they have three different accounts at three different branches does not increase their insurance coverage.
Fact: If a bank fails, the FDIC quickly provides depositors access to all of their insured money — we usually do NOT take longer than one business day after the bank is closed to pay depositors the full amount of their insured funds.
Contrary to misinformation that appears to be spread by some financial advisors and sales people, when an institution fails, federal law requires the FDIC to pay deposit insurance "as soon as possible." In most cases, the FDIC makes insured funds available to depositors on the first business day after the bank is closed, and often by finding a healthy bank to quickly assume the insured deposits of the failed bank. "With certain types of deposits, such as living trust accounts and deposits placed through brokers, the FDIC may need more time to gather important information and finalize the insurance payment," noted Martin Becker, a Senior Consumer Affairs Specialist at the FDIC.
Federal law also requires the FDIC to pay 100 percent of the insured deposits up to the federal limit — including principal and interest. If you have deposits over the limit, you'll immediately receive a "claim" against the closed bank for the remaining money that is not FDIC-insured.
The amount you recover on your uninsured deposits will depend on how much the FDIC recovers by selling the bank's assets. While that process can take several years, in some cases the FDIC is able to make an initial payment on the uninsured portion of deposits within a few days or weeks of the closing. Additional payments may be made over the course of a year or two after the bank failure.
Example: Joe has $280,000 in a savings account at a bank that fails. Joe will quickly be paid $250,000 through FDIC insurance. As for the remaining $30,000 that is uninsured, Joe's future recoveries will be based on the sale of the failed bank's assets. The sales process may take a year or two, but uninsured depositors may receive periodic payments.
For more about what happens when a bank fails, see the FDIC brochure "When a Bank Fails" at www.fdic.gov/consumers/banking/facts/index.html. Or, call the FDIC at 1-877-ASK-FDIC (1-877-275-3342).
Fact: Deposit insurance for joint accounts is based on the names listed as owners — changing the order of names or Social Security numbers will NOT increase the coverage.
Many depositors mistakenly believe that by changing the order of Social Security numbers, rearranging the names listed on joint accounts, changing the style of the names or substituting "and" for "or" in account titles they can increase their insurance coverage.
"Consumers need to know that these variations will not help to increase the total amount of deposit insurance coverage they receive if their bank fails," said James Williams, an FDIC Senior Consumer Affairs Specialist. "The FDIC simply adds each person's share of all the joint accounts at the same institution and insures the total up to $250,000."
Example: A husband and wife have two joint accounts at the same bank totaling $600,000. One account is titled "Katherine Smith and Joseph Smith." The other is titled "Joe Smith and Kathy Smith." It doesn't matter that they restyled or rearranged their names in the account title. If their bank fails, the FDIC would insure each one's share of the joint accounts up to $250,000 — $500,000 in total — leaving $100,000 uninsured. (Each person's share is presumed to be equal unless stated otherwise in the records.)
Fact: Adding beneficiaries can increase the deposit insurance coverage for revocable trust accounts — but NOT for retirement accounts.
Under the FDIC's rules, a person's Individual Retirement Accounts (IRAs) at one bank are insured up to $250,000, regardless of whether there are beneficiaries named on the account. But a common misconception is that adding beneficiaries to a retirement account will increase a depositor's insurance coverage. That's because many people confuse the insurance rules for IRAs with those for a different category of accounts called revocable trust accounts — typically payable-on-death (POD) and living trust accounts — for which the number of beneficiaries can increase the deposit insurance coverage.
With revocable trust accounts, a depositor naming multiple beneficiaries can, depending on the circumstances, receive up to $250,000 in FDIC insurance coverage for each beneficiary. For example, a revocable trust account with one owner would be insured to $1 million if there are four beneficiaries. "The account owner by himself or herself is not entitled to an additional $250,000 — that's another common misconception," explained Chante Freeman, an FDIC Consumer Affairs Specialist.
Example: Betty has two accounts at her local bank. One is a payable-on-death account totaling $475,000 and naming her two grandchildren as beneficiaries. Her other account is an IRA totaling $300,000 and naming the same two grandchildren as beneficiaries. Because Betty named two beneficiaries to her POD account, which is insured under the revocable trust category, she would qualify for $500,000 in insurance coverage ($250,000 for each beneficiary named), so the full $475,000 would be protected if the bank fails.
Even though Betty named the same two grandchildren as beneficiaries on her IRA, that account is insured up to only $250,000 because the beneficiaries have no effect on the deposit insurance coverage. That means the $50,000 in her IRA account that is over the insurance limit would be at risk of loss if the bank fails.
Note: Unlike the other deposit insurance categories, certain retirement accounts will remain covered up to $250,000 after December 31, 2009.
For more help or information from the FDIC regarding your insurance coverage, see the resources listed on For More Help from the FDIC About Deposit Insurance and Other Topics.
Last Updated 5/26/2009