As a child, you more than likely had a piggy bank—a place to keep your hard-earned dollars, quarters, nickels, and dimes safe, secure, and easily accessible. True, your piggy bank didn't provide you with the benefit of interest on your money but when you wanted a new doll, book, or action figure your money was safe in your bedroom and a withdrawal was as easy as pulling the cork! As we got older, we all learned the benefits of interest and by the time you had your first part-time job, you made one of your first steps into adulthood by opening a bank account. By doing so you gained the benefit of earning interest on your money, maintained easy access to your money through checks. Plus, you knew your money was held safely in the bank.
Recent news has shed light on how seriously larger financial and investment institutions have been impacted by the sub-prime mortgage situation that has swept across the United States over the past two years. Although it is rare, banks do occasionally fail. Fortunately for consumers in the United States, the Federal Deposit Insurance Corporation (FDIC) is in place to provide a safety net for a sizable amount of funds held in insured financial institutions.
Created by Congress in 1933, the FDIC is an independent agency of the United States government set in place to provide security for the savings of millions of Americans. The familiar gold and black plaque and words "Member FDIC" or "FDIC Insured" indicate that the FDIC covers the bank. This means that the FDIC will protect depositors against the loss of their insured deposits in the rare instance where an FDIC—insured bank or savings institution fails. Insurance through the FDIC is backed by the full faith and credit of the United States government.
According to the FDIC, in the unlikely event of a bank failure, the FDIC covers the balance of each depositor's account, dollar-for-dollar, up to the insurance limit. That coverage includes the depositor's principal plus any interest accrued through the official date of the bank's closing. The FDIC insures all types of deposits that a financial institution receives during its usual course of business. Covered deposit types include the following:
FDIC coverage does not include money people have invested in stocks, bonds, municipal bonds, mutual funds, annuities, or insurance products even if those products were purchased at an insured bank through an affiliated agent/broker/dealer that is offering the products on behalf of the bank. Customers also remain liable for any outstanding payments due on a loan or credit card and would continue to make payments as they did before the bank failed until instructed otherwise (in writing) by an acquiring bank or the FDIC.
Although FDIC coverage is substantial, it does have its limitations. The FDIC's basic insurance amount is $100,000 per depositor, per insured bank (including principal and accrued interest). If you have $98,000 in a bank account and that principal has earned $3,000 in interest (totaling $101,000) the account is only covered up to $100,000 and the additional $1,000 is uninsured. Dividing funds and depositing them into different accounts cannot increase coverage.
If your deposit amounts exceed the $100,000 amount, you can provide coverage to any excess amount by depositing that excess amount with a separate FDIC-insured bank. If a bank has branch offices, the main branch and all of its satellite offices are considered one FDIC-insured bank, so making deposits at different branches does not provide additional coverage. The same holds true for online banking. To verify that the banks you deal with are indeed insured separately by the FDIC, check the FDIC Certificate numbers—they will be different.
In the unlikely event of a bank failure, Federal law requires the FDIC to make payments of insured deposits "as soon as possible" following the failure of an insured institution. The FDIC states that a bank that has failed will typically close on a Friday and the FDIC's goal is to make deposit insurance payments within one business day of the bank failure. The FDIC will work through the weekend to complete deposit insurance determinations for most deposits and will be ready on Monday to either transfer the insured portion of a deposit to another FDIC-insured institution or issue deposit insurance payment checks.
FDIC coverage does not apply to valuables held in safe deposit boxes. Coverage for such items may fall under the bank's private insurance or the safety deposit box holder's personal homeowner's insurance.
There are specific situations where certain accounts (held jointly or trusts) may exceed the $100,000 limit. To calculate your insurance coverage, use the FDIC's online Electronic Deposit Insurance Estimator at www2.fdic.gov/edie.
Since its creation seventy-five years ago, the FDIC has handled over 2,200 bank failures and "no one has ever lost so much as a penny of FDIC-insured deposits—not a single penny" says FDIC Chairman Sheila C. Bair. With such a track record, we can all rest assured that even in uncertain economic times, our hard-earned dollars are truly safe and sound as long as our chosen banking establishments are FDIC-insured. So the next time you're in line waiting for a bank teller, take note of that FDIC plaque and certificate number and adjust your finances accordingly to take full advantage of the protection the FDIC and United States government offers.
With the recent passing of House bill H.R. 1424, the government "bailout" effectively provides a "temporary" increase to coverage amount for savings held in an FDIC-insured establishment. The bill provides for an increase in coverage from $100,000 per depositor to $250,000 per depositor from the date enactment of the bill (October 3, 2008) and ending on December 31, 2009. Although the additional coverage is place, keep informed of future government regulation changes to make certain the amount of money you hold in your accounts is fully covered.
As with any financial matter, consult with your financial or tax advisor concerning any questions or concerns regarding this topic.
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