Bank analysts and pundits often disagree when estimating the number of financial institutions that will fail in the near future. Some expect nearly 200 banks to go belly up in the next two years; others expect less than 50 bank failures by the end of 2010.
Most would agree, however, that people who maintain deposits at banking institutions face some level of risk, a risk that can be mitigated by Federal Deposit Insurance Corporation (FDIC) insurance.
Basic coverage
In general, the FDIC provides $100,000 of basic insurance protection for personal bank accounts, including certificates of deposit (CDs). But with a little ingenuity, even larger deposits can be covered.
Get more protection
Let's say you and your spouse want additional FDIC coverage. First, you set up individual accounts ($200,000 total coverage). Then, because the FDIC insures up to $250,000 per person on retirement accounts, you gain another $500,000 in FDIC coverage on your individual retirement accounts (IRAs).
Next you establish joint ownership accounts, which provide another $100,000 maximum coverage for each person. Your coverage increases by $200,000.
Finally, you set up revocable trust accounts, payable upon death, naming each other as beneficiary. For these accounts, maximum coverage for each spouse is $100,000. Total FDIC insurance protection for all of these accounts: $1.1 million.
CDARS option
On the other hand, you might decide to increase your coverage by opening accounts at various FDIC-insured banks. Lately, this process has received a boost by the advent of a network called the Certificate of Deposit Account Registry Service or CDARS.
Using this service, depositors can choose a home bank that splits a large deposit into amounts that are under the FDIC insurance limits. The bank then disperses the deposits to member banks and sets a single interest rate for the entire amount. Although this service has some disadvantages (for example, you might get better CD rates by breaking up the deposit yourself and shopping around), it simplifies the process of obtaining FDIC coverage for large deposits.
It's important to remember that certain types of assets aren't covered by FDIC insurance. These include contents of safety deposit boxes, annuities, life insurance policies, mutual funds, and other types of investments.
To learn if your bank is FDIC-insured, visit the FDIC Web site. By the way, the National Credit Union Association or NCUA provides similar deposit insurance for credit union customers.
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