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FDIC Insurance Coverage Limits

With all the recent bank failures and looming potential failures (WaMu is on everyone’s radar now [3]), a lot of people are worrying about and searching for information about FDIC insurance. The FDIC, short of the Federal Deposit Insurance Corporation, is a government corporation that insures banks deposits up to, generally, $100,000. The corporation was created after the Great Depression to dissuade individuals from going to banks and withdrawing their money if they though the bank was going under. With the insurance protecting the deposits, there would be no need for people to ‘run’ to the bank to withdraw their funds before a potential collapse. With many banks, a bad situation is made fatal because of a run.

FDIC Insurance Coverage Limits

In a nutshell, each person at each institution has $100,000 of coverage under FDIC insurance limits. If you have less than $100,000 in deposits at an FDIC insured institution (they will have signs, or you can confirm by using the FDIC’s Bank Find [4] tool or calling them up and asking – 877-ASKFDIC). There are certain assets at a bank that are not covered by FDIC and they include any debt issued by the US Government (bonds, bills, notes, etc.), stocks, bonds, and similar investments, as well as anything in a safety deposit box.

Each of those is covered by something else. US Government securities are backed by the government, stocks, bonds and similar investments are protected against fraud by SIPC insurance, and the safety deposit box is generally under the protection of your renters or homeowner’s insurance policy.

The worst thing you can do to a bank is to withdraw your funds. If you have less than $100,000, you’re protected by the FDIC; if you have more, then you have just cause in withdrawing your funds. When you withdraw your funds, the bank has to find the cash to give you. Since they’ve lent out so much of it, they have to figure out ways to get it back to you. Now multiply it by thousands of people withdrawing money, your classic “run on a bank” scenario, and you’ll see why banks collapse and must be rescued by the FDIC.

So, the best thing to do is to keep your deposits under $100,000 at an FDIC insured bank and relax. If the bank fails, chances are you will have access to your funds a couple days later (FDIC usually closes banks on a Friday and re-open them on Monday). When IndyMac collapsed, it was closed for Saturday and its doors were open on Monday as IndyMac Federal Savings Bank. When NetBank went under, people couldn’t log in for a day or two and then they all had access to funds via ING

How To Get More Than $100,000 Coverage

If you’re rolling the dough, the easiest way to get more than $100,000 of coverage is to deposit it at separate banks. The insurance covers you for $100,000 per person per institution so you would only need to spread your money out across multiple banks. With many of the best savings accounts [5] within a percentage point of each other in interest APY, you don’t sacrifice much by spreading it around.

There are also ways to structure your accounts at a single bank such that you get more than the standard $100,000 of coverage. The easiest way is for a couple to put both of their names on a joint account, this increases coverage to $200,000 for the couple ($100,000 each). Remember, the coverage is on the person and not the specific account so you can’t just open more accounts at the same bank for more coverage.

Another way is through the use of Payable-on-Death (POD) accounts if they’re structured as revocable trust account. A POD account has listed beneficiaries and the account owner is insured up to $100,000 for each beneficiary. It gets a little complicated but Bank Deals has a good two part article on the subject (Part 1 [6], Part 2 [7]). I’m not an FDIC expert (and to my knowledge, neither is Ken at Bank Deals, so consult a financial professional to confirm what you read).