True or False:
Federal Deposit Insurance Corp. is only obligated to pay off 7% of the value of my deposits and that it has 99 years to pay off the balance.
I stumbled onto this recently and it caught my attention. There’s a great deal of misinformation and confusion about FDIC insurance coverage and limitations. And, of course, with the list of failed banks growing monthly there’s also a lot of panic about what “FDIC Insured” really means.
The answer to the question above is False (see Myths # 3 and #4 below), but how many people knew that? I went digging and found an article on the FDIC website itself that details many “mythconceptions”, if you will. You can read the whole article here , but this is a quick overview.
Myth 1: The most a consumer can have insured is $100,000.
This is based on the misconception that the FDIC has knowledge of all bank accounts a person has. This is simply not true.
“The reality is that your accounts at different FDIC-insured institutions are separately insured, not added together, and you may qualify for more than $100,000 in coverage at each insured bank if you own deposit accounts in different “ownership categories.”“
So, if you have $100,000 in an individual ING savings account (which is FDIC insured) and you have another $100,000 in a joint checking (FDIC insured) account at HSBC, then you are actually covered for $200,000. The individual and joint account types are considered”ownership categories.”
It’s even better than that:
““Depending on the circumstances, a family of four could have well over $1 million in deposit insurance coverage at the same bank,” said James Williams, an FDIC Consumer Affairs Specialist. “And that coverage is separate from what is protected at any other FDIC-insured institution.”“
So, you could have $100,000 insured at your ING savings account AND another $100,000 insured at your HSBC savings account. Why anyone would want that much in a savings account is another topic…
Myth 2: Changing the order of names or Social Security Numbers can increase the coverage for joint accounts.
“Many depositors mistakenly believe that by changing the order of Social Security Numbers, rearranging the names listed on joint accounts, or substituting “and” for “or” in account titles, they can increase their insurance coverage.”
I’ve never heard of this one, but it doesn’t surprise me. I think it’s rooted in the thinking that the government deals in detailed legalese much of the time, and that if you know the system you can get around the limitations by exploiting the loopholes.
According to Kathleen Nagle, chief of the Deposit Insurance Section in the FDIC’s Division of Supervision and Consumer Protection:
“These moves will have no impact on joint account coverage.”
Myth 3: If a bank fails, the FDIC could take up to 99 years to pay depositors for their insured accounts.
Not only is this entirely false, but it appears to be a common tool of deception used by sales people to steer clients away from FDIC insured products.
“Historically, the FDIC pays insured deposits within a few days after a bank closes, usually the next business day. In most cases, the FDIC will provide each depositor with a new account at another insured bank. Or, if arrangements cannot be made with another institution, the FDIC will issue a check to each depositor.“
We’ve seen this recently with the IndyMac failure. The FDIC assumed control over the weekend and by Monday, checks had cleared and people’s deposits were available – even up to half of uninsured deposits. All in all, a fairly smooth transition considering the circumstances and initial panic.
Myth 4: The FDIC only pays failed-bank depositors a percentage of their insured funds.
The FDIC site says this is often peddled with Myth #3 by those afore mentioned unscrupulous sale people.
From the article:
“Federal law requires the FDIC to pay 100 percent of the insured deposits up to the federal limit – including principal and interest. If your bank fails and you have deposits over the limit, you may be able to recover some or, in rare cases, all of your uninsured funds. “
It also states:
“However, the overwhelming majority of depositors at failed institutions are within the insurance limit, and insured funds are always paid in full.“
This makes sense. You’ve got to figure that most people either have no where near $100,000 in assets to be protected by FDIC insurance, or they are financially savvy enough that they have that money at work in uninsured assets, like investment accounts, real estate and personal businesses.
Myth #5. Deposits in different branches of the same bank are separately insured.
This is like a cousin to Myth #1.
“FDIC insurance is based on how much money is in various ownership categories (single, joint, retirement, and so on) at the same insured institution. It doesn’t matter if the accounts were opened at different branches – they are considered the same bank for insurance purposes.“
It’s all in the category (account type) and institution folks.
Myth #6. Any product sold by a bank is insured by the FDIC.
Banks sell all kinds of financial products. CDs, checking and savings accounts are FDIC insured, stocks, bonds, and mutual funds are not. It’s important to know the difference. If you don’t know, ask. You can contact the FDIC itself at their website as well.
Myth #7. Each beneficiary named on an IRA (Individual Retirement Account) increases the FDIC insurance coverage.
The truth:
“No, the number of beneficiaries on an IRA does not affect insurance coverage. This misconception appears to be based on confusion with the rules for per-beneficiary coverage of revocable trust accounts“
Well, that’s the first 7 Myths. There are 3 more at the website , but they deal mostly with trusts which is not really my forte.
Hopefully this was helpful, and maybe you learned a few things. I know I did.
Technorati Tags: FDIC, failed banks
I was told today by a Sovereign Bank financial advisor that the FDIC can take up to 99 years to pay funds from a failed institution. “Companies that offer annuities have more $$$ and are better prepared to make back $$$” I told her I had never heard of this and inquired if the bank disclosed this. She said it’s in the fine print
True/Not true 10/23/2008
Regina,
It sounds like that adviser was trying to sell an annuity!
As the FDIC website states, they are required by law to provide the funds “as soon as possible.” As we’ve seen just this year, the FDIC usually takes control of a bank on Friday, and re-open on the following Monday with no interruption in fund availability. “As soon as possible” is pretty vague, but I’m pretty sure it’s a lot less than 99 years!
Wow! what an idea ! What a concept ! Beautiful .. Amazing