Not All Deposits in Banks Insured

Investors driven to safe havens--such as bank deposits and certificates of deposit--may be shocked to find that not all bank deposits are safe.

In the last three years, investors have lost $114 million to bank failures because they exceeded the $100,000-per-depositor insurance limit imposed by the Federal Deposit Insurance Corp.

And even as failures such as the collapse last summer of Superior Bank of Hinsdale, Ill., grab headlines, the estimated amount of uninsured deposits in U.S. financial institutions has been rising steadily. Almost 28% of bank and thrift deposits were uninsured as of last fall, up from 19.7% in 1996, according to the FDIC.

Although some who lost money on uninsured deposits knew they were taking risks by leaving more than $100,000 on deposit in a single financial institution, many did not. They thought their funds were fully insured, until their banks failed and the FDIC informed them about how much they had lost, regulators said.

It’s possible to have more than $1 million on deposit in a single institution and have it completely FDIC insured. However, to do so, investors must set up their accounts carefully, according to detailed FDIC rules. Otherwise, any amount over $100,000 per depositor is at risk.

What do you need to know?

Basics

Federal deposit insurance protects principal and interest of up to $100,000 per depositor, per bank. However, those who properly title their accounts can leave significantly more in a single institution and be fully covered. That’s because joint accounts, accounts that are payable on death to a qualified beneficiary and retirement accounts are separately insured.

Consider this hypothetical example. Jane Smith deposits $100,000 at her bank in her own name. She also opens a joint-ownership account with her husband, John, for $200,000. She sets up a $300,000 account that will go to her three siblings--$100,000 each to Keith, Karen and Kevin--when she dies. And she sets up a $400,000 account, which is payable on death to her four children, Mary, Maura, Meg and Michael. Finally, she has a $100,000 individual retirement account in her own name. The entire $1.1 million is fully insured by the FDIC.

Tricks

But a tiny misstep can jeopardize that insurance coverage.

For instance, payable-on-death accounts qualify for separate insurance coverage only if the beneficiary is a child, grandchild, parent, sibling or spouse of the account owner.

If Jane made the mistake of naming a niece, nephew, in-law or cousin as the beneficiary of any of those payable-on-death accounts, the money earmarked for that nonqualified beneficiary would be aggregated with her individual deposits to determine how much insurance coverage she had. Any amount above $100,000 could be lost.

In addition, the beneficiary must have a complete right to the cash, without condition, at Jane’s death. If there are any conditions on the transfer, such as the child must graduate from high school or some of the money would go to charity before the named beneficiary gets the rest, the separate FDIC coverage is lost.

As a result, assets in living trusts rarely qualify for separate FDIC coverage because these trusts commonly have some condition on the beneficiary’s right to the funds.

Some depositors also mistakenly assume that they can get vast amounts of FDIC coverage by setting up numerous joint accounts. However, the interest of each individual owner in a joint account is aggregated with that owner’s share of all other joint accounts to determine insurance coverage.

In other words, if Jane sets up joint accounts rather than payable-on-death accounts for her children and siblings, the amount of insurance coverage on her accounts would plummet.

She still would have $100,000 in coverage for her individual account, $100,000 for her retirement account and $100,000 for her first joint account. But she would not have the additional $700,000 in coverage she would get by designating those as pay-on-death accounts.

Also, even though retirement accounts are a separate category, garnering separate FDIC coverage, all individually held retirement accounts are lumped together. (Company retirement accounts do get separate insurance, however.)

Consequently, a person with a traditional IRA, a Keogh account and a Roth IRA would have to aggregate all of those accounts to determine how much was covered. If $100,000 was deposited in each of those accounts, $200,000 of this individual’s retirement money would be at risk.

Pension and profit-sharing plans get so-called pass-through coverage. That means a plan with 10 equal beneficiaries could have up to $1 million deposited in one bank and be fully covered.

Some depositors also mistakenly assume that certificates of deposit that are purchased from a broker have separate coverage. However, they are generally aggregated with any similar account that an individual has at that same bank. If those accounts add up to more than $100,000, the overage is not insured.

When It Counts

It’s worth noting that FDIC insurance coverage kicks in only in the rare event that a bank fails. However, at that point, the coverage is invaluable.

In most cases, the agency would arrange for another bank to take over the insured assets and liabilities of the failed institution. Depositors and borrowers would suffer little interruption. If a buyer couldn’t be found to assume the assets, the agency literally could write checks to every covered depositor on the day of the failure for both the principal and interest in their accounts.

If a single depositor has many accounts adding up to more than $100,000, there could be a delay while the agency checked account records to determine whether the amount over $100,000 deserves separate insurance coverage. At times like these, paying attention to the details can mean the difference between walking away whole or losing a fortune.

Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com/perfin.

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How to Protect Yourself

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* Make sure your bank is FDIC insured. You can call the FDIC at (877) 275-3342 or check the agency’s online database at www3.fdic.gov/idasp.

* Review the accounts that you and your family have at the bank.

* Check your coverage amounts on EDIE, the FDIC’s electronic deposit insurance estimator. It can be found on the agency’s Web site at www2 .fdic.gov/edie.

* Make adjustments to your accounts, if necessary, to bring them within the insurance limits.

* Review your coverage before you open a new account; after the death of a family member; if you receive a financial windfall; or if you have accounts at two institutions that merge, and the combined funds exceed $100,000.

Source: Federal Deposit Insurance Corp.