FDIC Consumer News

No one has ever lost a penny of FDIC-insured funds, but some people occasionally lose money over the insurance limit. While many of these consumers knew that their deposits exceeded the insurance limit, some did not. We want you to learn from them.

When a bank fails, insured deposits are completely safe. Historically, more than 99 percent of the deposits in FDIC-insured bank failures have been fully protected. But that also means that some depositors occasionally have lost money because they had accounts over the insurance limit. (In one extreme example from a recent bank failure, a customer with $1.4 million in deposits found out that his accounts were only insured for $415,000 a loss of nearly $1 million.) Sadly enough, uninsured depositors could have had their money fully protected if they had been more careful to keep their deposits within the insurance limit.

"The hardest part of my job is telling depositors they have lost money, and the more they will lose, the harder it is to tell them."

Kathleen Halpin, FDIC insurance claims agent

"The hardest part of my job is telling depositors they have lost money, and the more they will lose, the harder it is to tell them," says Kathleen Halpin, an FDIC insurance claims agent based in Dallas, Texas. "This is one part of my job that does not get easier the more I do it."

Fortunately, you don't need to worry about your deposit insurance coverage if you or your family have less than $100,000 in all your accounts combined at the same insured institution. But if your accounts total $100,000 or more, and having all of your funds protected by FDIC insurance is important to you, it makes sense to be sure they're within the insurance limit. (Yes, it's possible under the rules to have more than $100,000 on deposit, even far more, and still be fully protected.)

To help you avoid repeating the mistakes of others, FDIC Consumer News has compiled the following list of the "Top 10" situations in which depositors have lost money in a bank or savings institution failure.

This informal survey, based in part on discussions with FDIC insurance specialists around the country, shows that the rules governing joint accounts and revocable trust accounts (a type of payable-on-death or "POD" account) still seem to present the most problems even though the FDIC revised the rules for these two accounts in April 1999 to make them easier to understand.

1. Overestimating the insurance coverage of joint accounts.

Depositors incorrectly assume that they can establish multiple joint accounts with different parties and have each account separately insured. While the FDIC simplified the joint account rules in 1999, there still are important limits for you to understand. Under the new rules, the FDIC looks at each person's share in all the joint accounts he or she owns at one institution and insures that sum up to $100,000, no matter how many joint accounts or co-owners there may be.

For example, suppose you have two joint accounts at a bank—one with your spouse for $140,000 (with your share presumed to be $70,000), and a separate joint account with your brother for $120,000 (your share being $60,000). Your total insurance coverage for joint accounts would be $100,000, leaving $30,000 (your remaining share of the two joint accounts) uninsured.

To clarify another misconception about joint accounts, the insurance coverage isn't increased by such things as whose Social Security number or name is listed first. You also can't increase your joint account coverage by varying your name, such as by showing James on one account and Jim on another. You also can't increase coverage by using "or" between the names rather than "and."

Before leaving our discussion of joint accounts, here are some words of caution: Make sure all co-owners sign the account's signature card, if there is one. Also, if you intend to add another person to your individually owned account as a "convenience signer," perhaps to give someone else the right to withdraw money on your behalf in an emergency, make sure that distinction is reflected in the deposit records. If that intention is not specified, the account may be insured as a joint account and that could possibly decrease your deposit insurance coverage.

2. Not understanding the insurance coverage of revocable trust accounts.

Revocable trust accounts give you the use of the money during your lifetime as the account owner, but the funds pass to specific beneficiaries when you die. They're also known by other names, including testamentary, payable-on-death, tentative, Totten trust, and "In Trust For" accounts.

Under the FDIC's rules, which were amended in 1999, each "qualifying" beneficiary's interest in a depositor's revocable trust accounts is insured up to $100,000, separately from any individual or joint accounts that you or your beneficiaries may have in the same institution, but only if certain conditions are met. In particular, the qualifying beneficiaries must be your spouse, children, grandchildren, parents or siblings. Other relatives, in-laws or friends do not qualify.

So, a $300,000 revocable trust account payable on death to a spouse, a parent and a sibling would be fully insured ($100,000 for each beneficiary). But if you named a non-qualifying beneficiary, such as a nephew, a sister-in-law, a great-grandchild or a friend, the portion payable to the non-qualifying beneficiary would be insured as your individually owned funds, limited to $100,000. Example: A $300,000 revocable trust you own that's payable to three friends would be combined with your individual accounts and insured only up to $100,000, not to $300,000.

Some consumers make deposits pursuant to formal revocable "living trust" agreements. The problem is that most living trust accounts don't qualify for $100,000 of insurance per beneficiary because the trust agreements place conditions on the interests of the beneficiaries. Examples: The beneficiary must get a college degree, or any payments to the beneficiary will be at the discretion of the trustee. These conditions mean that each beneficiary may or may not receive funds after the owner dies. In these cases, the money will be insured up to $100,000 as the grantor's individually owned funds, along with any other individual funds he or she held at the same bank, and not up to $100,000 per beneficiary.

3. Confusing joint accounts with revocable trust accounts.

In a recent closing, many depositors thought they had established joint accounts when in fact they had established revocable trust accounts, resulting in some funds being over the insurance limit. A possible example: A father opens a $300,000 account payable on death to a son and daughter, believing it's a joint account with the son and daughter insured to $300,000. But the father really has established a revocable trust or POD account, insured up to $100,000 for each child. Here, the $300,000 balance is insured up to $200,000 ($100,000 for the son and $100,000 for the daughter), leaving $100,000 uninsured. (Note: In this example, because the only designated beneficiaries are qualifying beneficiaries, the excess amount of $100,000 is not insured with the father's individually owned funds.)

"This unfortunate error caused many depositors to lose a lot of money," says Lesylee Sullivan, another Dallas-based FDIC claims agent.

4. Third-party deposits without your knowledge.

Suppose an attorney, real estate agent or some other person handling funds on your behalf makes a deposit into an escrow-type account at an institution where you already have accounts. That could happen, for example, when you sell your house or when you receive money from a lawsuit or an insurance claim. If the institution fails, those deposits would be combined with your other accounts and perhaps put you over the $100,000 limit. If you think a third-party deposit is going to be made, find out the details and make alternate arrangements, if necessary.

5. Not allowing for official checks to "clear."

If customers hear reports that a financial institution is about to fail, they may attempt to bring their accounts below the insurance limit by obtaining a "cashier's check" or some other "official check" drawn on that institution. But, until that check is cashed and clears through the check payment system, it is still legally considered a deposit at the failed bank. That check and any other deposits at the closed institution would be added together for insurance purposes.

Also, if you decide to close your accounts and combine them into one "official" check (one drawn on the bank) with you as the sole payee, keep in mind that the check will be insured as your individual deposit and only insurable to $100,000. The FDIC will not base its insurance determination on where the funds came from. That means, for example, if you receive an official check made payable to you alone for money that previously had been in a joint account insured to $200,000, it now would only be protected to $100,000 along with your other individually owned accounts.

6. Believing that interest earned is separately insured.

Many depositors believe that if they deposit $100,000 in a certificate of deposit (CD) and it earns $600 of interest, each portion would be separately insured. But under the rules, principal and interest are added together and insured to a maximum of $100,000.

Some depositors receive their earned interest in a separate check. For example, a person might have a $100,000 CD for which the depositor receives a $600 check at the end of each month. But suppose the depositor does nothing with these interest checks for five months and then the unthinkable happens—the bank fails. Instead of having just a $100,000 CD and a few days' accrued interest, the depositor has that plus $3,000 in uncashed interest checks that, under the rules, must be combined for insurance purposes. Again, because the checks weren't cleared through the banking system, they are still considered to be on deposit and are added together with the other deposits you own.

7. Not adjusting accounts in a timely manner after a depositor dies.

The FDIC's insurance regulations were amended in July 1998 to ease the potential financial hardship on depositors who have lost a loved one. For six months after someone's death, the FDIC will insure that person's accounts as if he or she were still alive. During this grace period, the insurance coverage of the deposit owner's accounts will not change unless the accounts are restructured by those authorized to do so. The FDIC applies the grace period only if its application would increase, rather than decrease, deposit insurance coverage.

Still, many people fail to act within the six-month grace period. Here's an example of what would happen: Joint accounts between a husband and wife would automatically become part of the surviving spouse's individual accounts at the bank unless a change was made within six months. That could put the survivor's individual accounts over the $100,000 insurance limit, potentially resulting in a financial hardship for a family already in grief.

8. Believing that IRAs and Keoghs are fully insured regardless of the deposit balance.

FDIC claims agents have recently encountered situations where depositors at failed institutions had Individual Retirement Accounts (IRAs) or Keogh plan accounts (similar to an IRA but for the self-employed) totaling well beyond $100,000. "Most of these IRA and Keogh depositors have been surprised to find themselves uninsured," says the FDIC's Sullivan. "The misconception is that retirement accounts are fully insured regardless of the amount, which is not the case."

Here's a quick overview of the FDIC's rules for retirement savings:

• IRAs and self-directed Keogh funds are separately protected from any non-retirement funds you may have at an insured institution, and they are added together and insured up to $100,000 in total.
• The Roth IRA created by Congress in 1997 is treated the same as a traditional IRA for deposit insurance purposes.
• The new Education IRA is not considered an IRA for deposit insurance purposes. Because of its features, the Education IRA is insured as an "irrevocable trust account." Such accounts may be insured up to $100,000 per beneficiary, but often they are insured only up to $100,000 for the entire trust. Some or all of the funds in an irrevocable trust account may even be insured as the depositor's single ownership funds. The coverage depends on the terms of the trust.

9. Not understanding the potential problems when depositing funds through a broker.

Many folks use deposit brokers to place funds for them in various FDIC-insured financial institutions. Typically, the broker will pool funds from many clients and make a single deposit in a financial institution on behalf of the many customers. While this arrangement is permissible, you still need to be careful.

Example: Your broker may put some of your funds in an institution where you, on your own, have made deposits. "If you find that out only after the institution has failed, you could have some money uninsured," Halpin says. That's because your deposits from both sources would be added together and insured only to the federal limit, which is generally $100,000.

Chris Hencke, an FDIC attorney in Washington who specializes in deposit insurance matters, points to another potential concern: You need to be sure you're dealing with a reputable company. "The FDIC does not examine, approve or insure deposit brokers," he says. "If a broker collects money from you but fails to place those funds at an FDIC-insured institution, your money will not be protected by the FDIC." How can you check out a deposit broker? Try the National Association of Securities Dealers at (800) 289-9999 for "registered" broker/dealers. Or, contact the state government agency that regulates businesses in your state (if it requires brokers to register in order to do business there).

Hencke also says that, before you commit funds to a broker, ask how it will title the account at the bank. Why? Because if the bank fails, the FDIC looks at how the institution's records say the account is owned. You want the account records to indicate that the broker is acting only as an agent for customers like you, so each depositor can qualify for $100,000 of FDIC coverage. Otherwise, the entire account would be protected to just $100,000 in total. "If the account is titled ÔABC Brokerage Company,' and nothing else, the FDIC would view the broker as the sole owner of that deposit, with insurance limited to $100,000," Hencke explains. "But if it's titled something like ÔABC Brokerage Company as Custodian for Customers,' you and the other customers would qualify for your own $100,000 of protection."

10. Overestimating the coverage of funds deposited for a deceased person's estate.

Many executors or administrators erroneously believe that the funds they deposit for a deceased person's estate are insured for some unlimited amount or, at the least, up to $100,000 per beneficiary. (For example, if a surviving spouse and child eventually are to receive the deposited money, the estate's manager could mistakenly believe the funds are entitled to $200,000 of insurance protection.) But FDIC attorney Hencke says that under the rules, the funds are still insured to the deceased person, not to the heirs. "It's only after those distributions are made that the money is insured to the heirs," says Hencke. "Of course, this assumes that the heirs place the money in accounts at FDIC-insured depository institutions."

In addition, Hencke notes that if the executor or administrator deposits the money into a bank where the deceased person already had funds, all of that money would be combined for insurance purposes under the same $100,000 limit. What's the lesson here for executors? "Be aware of the $100,000 limit prior to making distributions of the funds to the heirs or beneficiaries," he says.

Final Thoughts

If you're concerned about your insurance coverage, periodically take some time to review your account balances and the FDIC rules that apply. It's especially important to review your coverage if there's been a big change in your life (such as a death in the family, a divorce, or if you deposit the proceeds from a home sale) or if you have accounts at two institutions that merge. Those events could put some money over the federal limit. If after reviewing your situation you find your deposits are over the $100,000 federal insurance limit, you have several options for protecting yourself. One option is to restructure your accounts at your institution (as described in this article). Another option is to move some of your funds to a second insured depository institution.

Review your coverage if there's been a big change in your life (such as a death in the family, a divorce, or if you deposit the proceeds from a home sale) or if you have accounts at two institutions that merge.

It also helps to remind yourself what federal deposit insurance does and doesn't cover. For example, remember that deposit insurance applies only to deposits and only in the event of an institution's failure. It does not, for example, cover the contents of your safe deposit box or any investments in mutual funds you purchased from an FDIC-insured bank.

We know that the insurance rules can be confusing. So, for more help or information, contact the FDIC as shown in the box below. We think you and your loved ones will agree it's worth taking the extra time to ensure that you are insured.