Answers for Savers on Some Federal Deposit Insurance Questions

President Bush’s plan announced this week to have the federal government take control of 224 of the nation’s most ailing savings and loans has focused new attention on the workings of federal deposit insurance. Many savers understandably are confused about whether their deposits are safe if their institution is taken over and possibly closed or merged.

“Deposit insurance is the most misunderstood aspect of consumer banking,” says Robert Heady, editor of Bank Rate Monitor, a North Palm Beach, Fla., newsletter.

Here are some answers to commonly asked questions about federal deposit insurance:

Question: How do I know that an institution is covered by federal deposit insurance?

Answer: If the logo of the Federal Deposit Insurance Corp. for banks or the Federal Savings and Loan Insurance Corp. for S&Ls; is displayed at the institution’s offices or in their advertisements, it is insured. Also, if an institution has “federal” in its name, it has federal insurance, although hundreds of firms without that word are insured as well.

To double-check a FSLIC institution, write the FSLIC Insurance division, 1700 G St. N.W., Washington, D.C. 20552, or call (202) 254-2200.

FSLIC provides a free brochure, “Protecting Your Savings,” which explains its system. You can get it by calling (202) 254-2200.

To double-check FDIC institutions, write FDIC, Corporate Communications, 550 17th St. N.W., Washington, D.C. 20429, or call (800) 424-5488. Also available at that number or address are two free FDIC brochures, “Your Insured Deposit” and “When a Bank Fails.”

Q: How financially sound is the insurance system?

A: Although FSLIC is under-funded to handle the burgeoning S&L; crisis, both it and FDIC are backed by the full faith and credit of the U.S. government. Since the formation of federal deposit insurance in the 1930s, not one depositor has lost a cent of fully insured funds.

Were either agency to run short of funds--not being able to raise enough from sales of bonds, sales of assets at failed institutions, assessments on member institutions or other means--they could always borrow from the Treasury, or Congress would approve an infusion of funds. Such an infusion is needed to help the FDIC handle disposition of the 224 thrifts it has been ordered to take over in the next few weeks.

The same is not true of state or private deposit insurance systems. Depositors in certain savings institutions in Ohio and Maryland covered by private insurance funds lost money when some of those institutions failed in recent years.

Q: Are credit union deposits also insured?

A: Yes, credit unions offer insurance provided by the National Credit Union Share Insurance Fund. Its terms are very similar to those of FDIC and FSLIC.

Q: Are there any differences between FDIC, FSLIC and credit union insurance?

A: The rules governing all three insurance funds are virtually identical, but there are some minor differences. For example, FDIC is considered to be somewhat stricter than FSLIC when it comes to the structuring of trust accounts. But from a practical standpoint for the average depositor, there really isn’t any difference.

The credit union fund is generally seen as the financially strongest of the three, followed by FDIC and FSLIC. But in any case, depositors will not lose any money insured by the three unless the government undergoes an unprecedented financial crisis.

Q: Is the $100,000 insurance limit per person or per account?

A: The insurance limit applies per person per account category, not per account. So if you have $80,000 in a certificate of deposit, $40,000 in a money market deposit account and $10,000 in a checking account--all at the same institution--it is considered to be a $130,000 deposit since those accounts are considered individual accounts (other categories of accounts include joint, trust and retirement accounts). Thus, $30,000 is uninsured.

Accordingly, don’t keep any more than $100,000 in any one institution, unless you use joint or trust accounts (described below). Spread your money around to other institutions. If two or more of them fail simultaneously, you will still get all of your money back. With some 14,000 federally insured banks and 3,000 federally insured S&Ls; nationwide, you can insure at least $1.7 billion if you put $100,000 in each.

Q: Can I place my accounts in different branches of the same institution and have them all insured?

A: You can’t get around the $100,000 limit by putting your accounts in different branches of the same institution.

However, accounts in different institutions owned by the same parent company will be treated separately, provided the institutions are separately chartered. Such would be the case at, say, Bank of America in California and Seattle First National Bank in Washington state. Both are owned by BankAmerica Corp., but they are separately chartered.

Check about the status of your institutions with FDIC or FSLIC at the numbers or addresses provided above.

Q: What if I have accounts at two institutions that are merged?

A: The amounts of all accounts of the same category will be added together for insurance purposes. But you will have a grace period to place any excess over $100,000 into other institutions. That period is six months or, if you have CDs, when each of them matures. You will not be forced to take an early withdrawal penalty.

Q: Does the $100,000 limit include interest as well as principal?

A: Yes. So if you have an account for $100,000, but interest earnings increase the account to $105,000, the $5,000 extra is not insured. If your institution fails and there is a payout, there is a good likelihood that you will lose that amount.

You can do several things to avoid this. Many institutions offering jumbo $100,000 CDs will automatically send you the interest payments by check (the danger of this, however, is that if the institution fails and is liquidated before the check clears, it may not be honored).

Better yet, many institutions offer jumbo CDs at $95,000 or so, so that a certain amount of your interest will always be covered within the $100,000 insurance limit.

Q: Can I use joint or trust accounts to place more than $100,000 in the same institution?

A: Yes. Joint accounts and certain trust accounts will be treated separately from regular individual accounts such as CDs, checking and passbook accounts. You can have $100,000 in your own regular individual account and then establish a $100,000 joint account with another member of your immediate family (spouse or children), and both accounts will be covered.

Under such arrangements, a family of four can conceivably keep $1.4 million in the same institution (or even more if members have individual retirement accounts).

Q: How can I structure joint accounts to take advantage of additional insurance?

A: Joint accounts must be set up so both parties are members of the same immediate family, both must sign the signature card and both must have equal drawing rights.

The joint account works only once with the same two names. Switching the order, or altering the names, won’t help you get around the rules.

But you can have two or more joint accounts with different members of your family and be covered, as long as your half shares of those accounts in total don’t exceed $100,000. So you can have one $100,000 joint account with, say, your spouse, and another with a child, and both will be covered, since the government will consider that your share of each is only $50,000.

Q: How can I structure trust accounts to take advantage of additional insurance?

A: You can set up various types of trust accounts and they may be insured separately if they meet certain complex guidelines that vary state by state.

But be aware that these accounts require the proper structure and paper work to ensure coverage. Consult your lawyer, accountant or other expert. Many larger, well-established institutions have forms already set up for such accounts, and trained experts to help you structure them correctly.

Q: What about IRA and Keogh accounts?

A: Individual retirement accounts and Keogh accounts for self-employed individuals are treated as separate account categories. Thus, they are insured separately from regular individual, joint and trust accounts. So you can have $100,000 in IRA accounts, $100,000 in Keoghs and $100,000 in other accounts--all at the same institution--and the entire $300,000 will be fully insured.

Q: Will the basic insurance rules change with the new round of S&L; takeovers ordered by President Bush?

A: No. Even though the takeovers of S&Ls; will now be overseen by FDIC--taking a role that FSLIC handled previously--FDIC is merely acting as FSLIC’s agent. The rules governing who and how much is protected will not change.

However, the procedures that FDIC follows in arranging upcoming thrift mergers, transfers of deposits or deposit payouts may be somewhat different from FSLIC procedures. But that will not affect the safety of your money or how quickly you will get it back in case of a closure.

Depositors usually get their money back within a week in the case of a payout. But payouts are rare; most thrift failures are resolved by having the institution or its deposits sold or transferred to another, stronger institution. Savers merely have their accounts switched to the new institution.

Q: Where can I get more information?

A: Call or write FDIC or FSLIC--using the numbers and addresses given above. Be aware, however, that neither agency is willing to give detailed legal opinions on unusually complex situations. Rather, they are more likely just to cite the applicable regulations. But if you have a complex case, be sure to write down exactly how your accounts are set up.

Another useful source for general information is “How Safe Is Your Money?” a booklet available for $2.50 from 100 Highest Yields, Box 088888, North Palm Beach, Fla. 33408-9990.

Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.