Tips on Maximizing FDIC Insurance Coverage
Recent bank closures may have you confused and concerned about what this might mean for you. (For more information about Silicon Valley Bank’s closure, read our blog about it here.)
In all the updates about these closures, FDIC insurance has been a hot topic of conversation, so we thought we would attempt to clarify what it is, how it works, and how it may impact you.
What Is FDIC Insurance and How Does It Work?
FDIC (Federal Deposit Insurance Corporation) insurance is a program that provides deposit insurance to protect depositors if their bank fails. The program was established in 1933 during the Great Depression to provide confidence and stability in the banking system. Today, it insures deposits at more than 5,000 banks and savings institutions in the United States.
FDIC insurance gives depositors peace of mind knowing that their deposits are protected up to a certain amount. This protection helps to maintain the stability of the banking system, as depositors are less likely to panic and withdraw their funds if they know they are insured by the federal government.
Read More: Silicon Valley Bank Collapse: What You Need to Know
Pros and Cons of FDIC Insurance
Pros:
Protection of deposits: FDIC insurance provides protection of up to $250,000 per depositor, per insured bank. This means that if a bank fails, depositors will receive up to $250,000 of their deposits back.
Certain investment firms have programs where you can receive increased insurance coverage through partner banks.
Stability of the banking system: FDIC insurance helps to maintain stability in the banking system by giving depositors confidence that their deposits are safe.
Free coverage: There is no cost to depositors for FDIC insurance. Banks pay premiums to the FDIC to fund the insurance program.
Cons:
Limited coverage: FDIC insurance only covers up to $250,000 per depositor, per insured bank account. If a depositor has more than $250,000 in deposits in one account at one bank, the excess amount is not insured.
Not all types of accounts are covered: FDIC insurance only covers certain types of accounts, such as checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs). Other types of accounts, such as retirement plans and investment accounts, are not typically covered.
Not all banks are insured: Not all banks and savings institutions are insured by the FDIC. It is important to check whether a bank is FDIC-insured before opening an account.
As an aside, credit unions are covered by the National Credit Union Association (NCUA). For more information on how that works, click here.
Overall, FDIC insurance is an important program that provides protection to depositors and helps to maintain stability in the banking system. However, it is important to be aware of the limitations of FDIC insurance so that you know where you do, and don’t, have coverage.
Lesser Known Tips to Maximize FDIC Insurance
While many people are aware of the basic coverage limits ($250,000 per depositor, per insured bank), there are lesser-known tips and strategies that can help you maximize your FDIC insurance coverage (which is helpful if your Financial Life Plan includes holding a larger amount of cash for a period of time).
Utilizing Multiple Account Ownership Categories
One way to increase your FDIC coverage is by utilizing multiple account ownership categories. For example, if you have a joint account with a spouse or family member, you will have up to $500,000 in combined coverage ($250,000 per person). Additionally, if you have revocable or irrevocable trust accounts, you may be able to extend your coverage even further. Trust accounts often allow for multiple beneficiaries, which means that you could have additional coverage for each beneficiary.
Spreading Your Funds Across Different Banks
Another way to increase your FDIC coverage is by spreading your funds across different banks. While it may be more convenient to keep all of your accounts with one bank, spreading your funds across multiple banks will increase your overall coverage.
Leveraging Revocable and Irrevocable Trusts
As previously mentioned, trust accounts can provide additional coverage. Revocable trusts are those that can be changed by the owner, while irrevocable trusts cannot be changed. By establishing a trust account, you can ensure that your beneficiaries are protected and potentially increase your FDIC coverage in the process.
Not all types of trusts are eligible for FDIC coverage, so it's important to understand the rules and requirements.
Navigating Joint Accounts and Beneficiaries
Joint accounts can be a convenient way for spouses or family members to share funds. However, there are important considerations to keep in mind when it comes to FDIC coverage and estate planning.
The Impact of Joint Accounts on FDIC Coverage
Joint accounts with two individuals are insured up to $500,000, but this limit is shared between the account holders. If you have multiple joint accounts with the same person, it is important to take this shared coverage into account.
For example, let's say you have a joint savings account with your spouse with a balance of $400,000, and a joint checking account with your spouse with a balance of $300,000. While the total balance of both accounts is $700,000, the FDIC coverage for both accounts is only $500,000, since the accounts are jointly held with the same person. This means that $200,000 of your funds are not covered by FDIC insurance if they are at the same bank.
As we mentioned earlier, spreading your cash across different bank accounts is typically best to ensure maximum protection.
Designating Beneficiaries for Increased Protection
Designating beneficiaries on certain accounts, such as retirement accounts or pay-on-death (POD) accounts, can provide additional coverage. For example, a POD account with two beneficiaries may be insured up to $500,000 (assuming $250,000 per beneficiary).
It is important to keep beneficiaries up to date and ensure that the account ownership and beneficiary designations are aligned with your estate planning goals.
Business Accounts and FDIC Insurance
Coverage for Business Accounts
FDIC coverage for business accounts works differently than coverage for personal accounts. Instead of the $250,000 coverage limit per depositor, per account type, per bank, coverage for business accounts is based on the number of business owners. Each business owner is insured up to $250,000 per ownership category, per bank.
Tips for Maximizing Business Account Protection
To maximize coverage for business accounts, it is important to understand the different ownership categories and ensure that the accounts are structured accordingly. For example, if you have multiple owners, setting up a joint account may provide additional coverage. Additionally, multiple accounts with different banks could provide more overall coverage.
Conclusion
FDIC insurance is an important safeguard for anyone who banks in the United States. By understanding the basics of FDIC insurance and implementing some lesser-known tips and tricks, you can maximize your coverage and ensure that your deposits are protected in the event of a bank failure. With careful planning and education, you can take control of your finances and rest easy knowing that your hard-earned money is safe and secure.
ABOUT TRIUNE FINANCIAL PARTNERS
Triune Financial Partners is committed to empowering people with life-changing financial counsel. Triune is an independent firm that values clarity, simplicity, and transparency. We're a fiduciary, which means we always put our clients' interests first. In addition to Financial Life Planning for individuals and families, we also serve 100+ businesses, churches and nonprofits to craft powerful 401(k) and 403(b) plans for their organizations. Whether you're working with one of our Financial Life Planners or setting up a 401(k) plan for your organization, Triune is here to help you thrive financially.
Interested in working with us? Get in touch here.
Sources:
https://www.fdic.gov/resources/deposit-insurance/faq/index.html