Are Your Bank Deposits Fully Insured? It Depends

With the fading of the savings and loan crisis amid the economic boom of the mid-1990s, few people worry about losing a big chunk of their savings through a bank failure.

But as international financial crises grind along, with reports from other countries about the potential insolvency of banks, the deposit insurance that U.S. bank customers enjoy is pleasantly reassuring.

The “full faith and credit” of the U.S. government stands behind deposit insurance, making bank deposits one of the safest financial vehicles anywhere.

The insurance has limits, however, along with some fairly complicated rules, especially for joint accounts (and some truly mind-boggling rules for trusts). So savers with large amounts of cash in the bank should make sure they are fully covered.

In addition, in recent years banks have been authorized to sell investments that are not, in fact, deposits, and therefore are not covered by deposit insurance at all.

Most people understand that deposits are insured up to $100,000. That amount is typically plastered over the lobbies of most banks, and it is emblazoned on the literature of the Federal Deposit Insurance Corp., which administers the coverage.

But confusion has often arisen about multiple accounts, joint accounts, trusts and “payable-on-death,” or POD, accounts. The FDIC’s rules are complex, and in the past more than a few depositors have found to their dismay that amounts they thought were insured were not.

The rules on joint accounts are “probably among the trickiest ones we have on our books,” an FDIC spokesman said. “When banks failed, we saw a lot of mistakes with those.”

The FDIC has proposed a major simplification of the joint-account rules as well as some changes in those governing POD accounts. The new rules could be in place later this year.

For now, the old rules still apply.

Under them, coverage for joint accounts is determined in two steps. First, all accounts with the same combination of owners in the same institution are added together. This total is insured up to $100,000. Thus, a husband and wife who have a joint account are insured up to $100,000, not $200,000. If they have two joint accounts in the same bank, the coverage is still $100,000. Changing the order of names, changing “and” to “or” in the account name or adding terms such as “tenancy in common” or “joint tenants” have no effect.

If each sets up a separate account, each account qualifies for $100,000 of insurance. In addition, if the couple move one of their joint accounts to another bank, each account is covered up to $100,000, or a total of $200,000, as insurance limits apply on an institution-by-institution basis.

The second step involves adding up all the interests of each depositor in all joint accounts and applying the $100,000 limit to each depositor.

For example, Husband and Wife have a joint account with $100,000 in it. Husband has a joint account with Son with $100,000 in it and a joint account with Daughter with $100,000.

None of these accounts is over the $100,000 limit, but there could be $50,000 of uninsured money.

How?

Assuming equal division of the accounts, Husband’s interest in the joint account with Wife is $50,000, his interest in the account with Son is $50,000 and his interest in the account with Daughter is $50,000, for a total of $150,000. Since no individual’s interest in joint accounts is insured beyond $100,000, Husband has $50,000 uninsured.

The pending new rules would eliminate the first step so that every joint depositor would have $100,000 of coverage, regardless of how it is distributed.

“Folks ask us all the time: ‘I have a joint account with my spouse for $200,000. Isn’t that fully insured?’ ” said Joseph A. DiNuzzo, FDIC senior counsel.

The current rule is “very confusing, [so] we are going to eliminate step one,” he said. Under the proposed rule, “any joint account would be insured to $100,000 per joint owner, period.” Thus, when a husband and wife have $200,000 in a joint account, it will be fully insured.

The second step would still apply, though, so depositors with interests in several joint accounts could still find themselves exposed if their interests exceeded $100,000.

The FDIC is also changing the rules on POD accounts to eliminate a trap for the unwary. POD accounts are those in which depositors indicate that upon their death the account will be payable to one or more beneficiaries. If certain conditions are met, such accounts are insured up to $100,000 per beneficiary.

Currently, however, only the owner’s spouse, children and grandchildren qualify for this coverage.

Many people assume erroneously that an account naming, say, a parent, a brother and a sister as beneficiaries would be insured up to $300,000. In fact, it would be considered the depositor’s individual account and would be protected with other individual accounts up to $100,000.

This has become an issue as more and more people are taking care of elderly parents or aging or disabled siblings, noted James McLaughlin of American Bankers Assn.

The proposed rules would qualify parents and siblings as beneficiaries, so an account could be insured for $100,000 each.

An even more complex set of rules governs trusts, and as more people adopt revocable trusts--sometimes called living trusts--to hold their assets in old age, they should be aware of those rules.

Earlier this year, the FDIC put into effect other rules to clarify and simplify insurance coverage. The most notable of these, for the average person, gives survivors six months after a depositor’s death to rearrange inherited accounts to avoid going over the $100,000 limit.

You can find helpful information on the FDIC’s World Wide Web site (https://www.fdic.gov).

Under “Consumer News,” the site now includes EDIE, for “electronic deposit insurance estimator,” an interactive program that allows people to estimate whether their deposits are covered.

If you have a trust, though, you can’t use EDIE. All you can do is read through the FDIC’s view of what is covered. For that, click on “Site Map,” then on “Manuals, Directives and Policies,” then on “The Financial Institution Employee’s Guide to Deposit Insurance,” then on “Appendix 2, FDIC Legal Division Guidelines on ‘Living’ Revocable Trusts.”