Protecting Your Money with FDIC and SIPC Insurance

During this time of economic crisis, it is more important than ever to insulate your assets from the effects of a bank failure. You can do so by making sure that your accounts are fully covered by FDIC and SIPC insurance.

The Federal Deposit Insurance Corporation was established in 1933 in response to a rash of Depression-era bank failures. Without insurance, many depositors were wiped out when their banks failed.

FDIC rules are complex, and this overview is only intended to explain the basics. Readers with complex investment strategies should consult their bank officers and attorneys for further guidance.

As a general rule, the FDIC insures all accounts at banks and savings associations for up to $100,000 per depositor per insured institution. If a financial institution goes belly up, and your accounts are within the covered amounts, your assets are secure. If an account is over the coverage limit, the excess amount may be lost. To prevent this, put the overage in another bank.

Proper structuring of your bank accounts will insure much more than $100,000. That's because the FDIC defines "depositor" as each form of account ownership. One person can have several forms of ownership, such as individual, joint, and revocable trust. Each individual account in a bank is insured for up to $100,000. Joint accounts are insured for up to $100,000 per co-owner. Unless otherwise specified, the contributions of the persons named on the account are assumed to be equal. Thus all joint accounts held by two people are insured for up to $200,000 in each bank. A revocable trust is insured for up to $100,000 per qualifying beneficiary, which must be a close family member.

There are two types of revocable trusts: informal and formal.

Informal trusts include Pay On Death (POD) accounts and Totten Trust accounts. The latter are typically governed by the Uniform Gifts to Minors Act. POD and Totten Trust accounts imply a revocable trust because in holding the account for a named beneficiary, the depositor is functioning as a trustee. These accounts are revocable because the depositor can modify or cancel them at any time.

A formal revocable trust, such as a living trust, is governed by a written agreement detailing legal terms and conditions. These instruments can be complicated and should be discussed with your attorney and financial institution officer.

Self-directed retirement accounts, including IRAs, Roths, and KEOGHs, are insured for up to $250,000 per depositor. They are called "self-directed" because the depositor has full control over how the funds are used.

Under FDIC rules, a husband and wife with two individual bank accounts, one joint account, a Totten Trust account for their child, and separate IRAs would be insured by the FDIC for up to $1,000,000. The individual accounts would be covered for $100,000 each; the joint account for $200,000; the Totten Trust account for $100,000; and the IRAs for $250,000 apiece. A video entitled "Overview of Deposit Insurance Coverage" , available on the FDIC website, provides further examples.

FDIC coverage for an irrevocable trust depends upon the terms and conditions of its governing instrument. Consult your lawyer and financial professional.

The FDIC also insures each corporate, partnership, and unincorporated association account for up to $100,000. It also covers each employee benefit (pension) account for up to $100,000 per employee.

At the time of this writing, the Senate is likely to approve a financial rescue package for the ailing U.S. economy that would temporarily increase the FDIC insurance limit of $100,000 to $250,000.

While the FDIC insures bank and savings association accounts, cash and securities in brokerage accounts are insured by the SIPC (Securities Investor Protection Corporation). The coverage limit is $500,000 per customer, including a maximum of $100,000 in cash. SIPC is governed by the Securities Investor Protection Act (SIPA) of 1970. Because SIPA defines "customer" as the capacity in which an account is held, brokerage accounts can be structured to cover much more than $500,000 in a manner similar to the FDIC bank deposits described above.

SIPC insurance kicks in when an investment firm that is a SIPC member fails and has insufficient funds to pay its customers. Cash within the covered amount is returned to the customer along with any securities, if available. SIPC coverage also applies when a customer's securities are stolen by a broker. However, SIPC insurance does not protect against decreases in the market value of securities or securities fraud (e.g., selling of worthless stock). Securities fraud is the purview of the SEC, FINRA (Financial Industry and Regulatory Authority), and state securities agencies.

It is also important to be aware that if a firm uses a separate entity to execute its trades, SIPC insurance only applies when the executing houses are also SIPC members. In addition, SIPC will only insure against an unauthorized transaction if the account holder filed a written complaint with his or her broker at the time the transaction was discovered. Customers should therefore carefully examine their statements and promptly inform their financial advisers of any irregularities.

Most banks and investment firms are members of FDIC and/or SIPC. This information can often be found on your financial statements. If in doubt, ask.