Protecting your hard-earned savings is important. One part of protecting your savings involves following the Federal Deposit Insurance Corporation (FDIC) rules.
In general terms, deposit accounts at banks and savings and loan associations are insured by the FDIC up to $250,000 per depositor per bank. Included are demand deposits and time deposits. Demand deposits are checking accounts, NOW accounts, savings accounts and money market deposit accounts. These accounts allow the owner immediate access to cash.
Time deposits include certificates of deposit. The interest accrued as of the date that an insured bank closes is included in the FDIC protection but only up to the $250,000 total. This means that if you want to make a large initial deposit, you should deposit an amount less than $250,000 so that interest earned is insured by the FDIC.
It is important to be aware of products the FDIC does not cover. The list includes mutual funds, stocks, bonds, life insurance policies or other securities. It also does not cover U.S. Treasury securities. These are backed separately by the full faith and credit of the federal government.
It might be tempting to open more than one bank account in your name at the same bank to increase your FDIC coverage. For example, opening a checking and savings account at the same bank. Unfortunately, this strategy usually won’t work because of various safeguards mentioned below.
It is worth noting that different deposits that represent different categories of owners may be independently insured. As an example, a joint account qualifies for up to $250,000 of coverage for each person named as a joint owner. That coverage is in addition to the $250,000 maximum coverage for each person’s aggregated single-owner accounts at that bank. Thus, a husband and wife could have $1 million in total FDIC coverage with the proper allocation among individual and joint accounts.
Other safeguards may come into play. Some state-chartered savings banks are required to have additional insurance to cover losses beyond the FDIC limits. Banks may also participate in the Certificate of Deposit Account Registry Service (CFARS). This service enables a bank to spread large CD deposits among multiple banks while keeping the amount at each individual bank, including the original bank, within FDIC insurance limits.
The FDIC website, www.fdic.gov, has a calculator that can help you estimate your total FDIC coverage.
Credit Unions are insured by the National Credit Union Share Insurance Fund (NCUSIF) instead of the FDIC. The fund is administered by the National Credit Union Administration (NCUA). Like the FDIC, the NCUA is an independent agency of the federal government and is backed by the full faith and credit of the U.S. Treasury.
It should be noted that some credit unions are not federally insured but are overseen by state regulators. These organizations typically have private insurance.
NCUSIF insurance covers share accounts, share certificates and share draft accounts. It does not cover investment products sold through credit unions. It covers single-owner accounts up to $250,000 per customer per institution. Different categories of ownership may have different levels of coverage. To estimate what is available for your account, you can use the NCUA’s website www.ncua.gov.
The final category in which you may have savings or investments is your brokerage account. Most brokerage accounts are covered by the Securities Investor Protection Corporation (SIPC). The SIPC is not a government agency but rather a nonprofit corporation funded by broker-dealers registered with the Securities and Exchange Commission. A non-SIPC member must disclose this fact to you.
The SIPC was created by Congress in 1970 to help return customer property if a broker-dealer or clearing firm experienced insolvency. The corporation also protects investors from unauthorized trading in or theft from a customer’s account.
The SIPC covers a maximum of $500,000 per customer at a given firm. It doesn’t protect against market risk or price fluctuations. Generally, it covers notes, stocks, bonds, mutual funds and other shares in investment companies. It does not cover investments that are not registered with the SEC. Additional information about SIPC protection is available at www.sipc.org.