FDIC Insurance Advice

With the recent surge in bank failures, the subject of deposit insurance has, once again, become foremost in the minds of most people. It is probably a good time to revisit the FDIC (Federal Deposit Insurance Corporation) and what it is intended to do. Also, there have been changes made to the FDIC that could impact your financial decisions on savings with banks.

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The FDIC goes way back to the time of the Great Depression when banks fell like dominoes as their deposits and assets couldn't hold up to the pressure for liquidity when people wanted to withdraw their money. It was created by the government to provide a level of protection for bank deposits in the form of deposit insurance. Up to this point, it has served its purpose as there has yet to be any loss of "insured" funds as a result of a failing bank.

The first issue to be aware of is that FDIC insurance only covers deposit balances up to $250,000 for any one account and applies only to checking, savings, CDs and some IRAs that are invested within FDIC insured banks. Any money invested through a bank in such instruments as stocks, bonds, annuities, money market funds or mutual funds is not covered.

Some depositors may assume that, just because a money market account offers check writing privileges that they too are insured. It is important to know what is covered and to what extent it is covered by FDIC insurance.

Should You Just Split Up Your Savings?

For savers who accumulate more than $250,000, the obvious solution may be to open another savings account or CD with another bank. Not necessarily. It really depends on how your accounts are titled and how many people are involved with the accounts.

For instance, if you own a joint checking or savings, the insurance covers each person on the account for up to $250,000, or $500,000 total. An IRA, held separately at the same bank is treated as a different owner (some IRA's may not fall within the insured category, so be sure to check with the bank).

Trust and corporate accounts are also considered separate owners but may have different limits of coverage. However, if you are a single depositor, any accumulation of funds among checking, savings or CDs, is limited to the $250,000 cap, and that is when it may be prudent to allocate your funds among different banks.

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Beware of Coming Changes

The $250,000 limit for insured deposits was only temporary and is slated to revert back to $100,000 on January 1, 2014 on all insured accounts except for eligible IRAs where it will remain at the higher limit. This upper limit has already been extended once when it was scheduled to expire at the end of 2009 and there is no way to predict whether it will be extended again.

Your Next Move

Be sure to check your insured accounts to see that they fall within the current coverage limits. You have until the end of 2013 to move your balances around so that they do not fall outside of the coverage limits within any one bank. It is advisable to not wait until then to consider your banking strategy, but that you begin to explore some banking alternatives now to become familiar with what they have to offer.

While other savings or investment alternatives don't offer the iron clad protection of FDIC insurance, you may want to also consider some alternatives that offer a high degree of safety that can also, perhaps, provide more in the way of return on your money and, or tax benefits.

Fixed annuities, provided through the highest rated life insurance companies are considered extremely safe (back by the credit-worthiness of the insurer as well state guarantee funds), and often yield higher returns than bank CDs. They should be considered for the long term portion of your retirement savings.

Mutual funds or money-market funds that invest in government backed securities are also considered to be very safe as the underlying investments are backed by the full faith and credit of the U.S. Government. Diversification is always the best way to achieve the optimal returns relevant to the low amount of risk that these types of vehicles provide.

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