Since the Silicon Valley Bank
SIVB,
failure last week, this may be the most asked question. The Federal Deposit Insurance Corporation (FDIC) was created to keep your banking money safe in 1933 after the stock market crash of 1929 and subsequent bank failures.
At this point, the FDIC oversees and insures over 5,000 banks. A receivership like Silicon Valley Bank is rare. In 2021 and 2022, there were no failed banks, according to the FDIC. This was atypical, as in many years there are a handful of bank failures. The size of this one is what caught everyone’s attention and reminds us to consider where our cash is held.
See: FDIC failed bank list
I learned how FDIC insurance works firsthand in the late ’80s. At the end of December, a regional bank went belly up. My issue? The company I worked for held all their money at that bank and had issued me a payroll check. I was able to deposit it, but the check bounced. This left me with a host of overdrafts as I had paid my monthly rent, utilities, and other bills, before leaving for a New Year’s ski trip. The FDIC insured the bank and the company I worked for was made whole. The company refunded me for the overdrafts and the paycheck was reissued from their new bank. The value of having a FDIC-insured bank in action saved my day and my pocketbook. Not to mention my job, since the company stayed in business.
How much of your money is safe?
When it comes to the FDIC, the insurance per account holder is $250,000 at an FDIC insured bank. You do not buy the insurance, the bank does. You are covered automatically when you have savings in a FDIC-insured bank.
Checking, saving, CDs are insured up to $250,000 per person, not per account; however, there is a cash savings strategy that creates more coverage. If you have a joint account, you both are covered for $250,000, a total of $500,000.
Another strategy is for your account to establish it as a Paid on Death (POD), as the FDIC insures your beneficiaries as well. A client of mine routinely kept over $500,000 in her savings account to feel comfortable. She directed the bank to add POD designation to her account so that the cash would go to her three children equally at her death. The FDIC insures up to $250,000 per beneficiary, so this step also upped her insurance (3 x $250,000 coverage was added) . This beneficiary impact also applies to revocable trust beneficiaries, though starting on April 1, 2024 the coverage will max out at $1,250,000 for trusts.
Your retirement accounts in the bank are also insured up to $250,000 as long as they are in cash accounts, not investment accounts with a bank affiliate.
The FDIC goes beyond giving bank depositors peace of mind by examining and supervising banks to help prevent the need for their insurance. They also take receiverships of failed banks. In addition, they have consumer programs, including Money Smart, a financial education resource.
Other insurance for your cash
Other financial institutions have insurance, too. If you have money in a credit union, they have insurance through National Credit Union Administration (NCUA) . NCUA was established in 1970 to insure and oversee member credit unions. Their insurance coverage limit is also $250,000 on your cash accounts and works similarly to the FDIC.
Securities Investor Protection Corporation (SIPC) covers brokerage firms when they are financially troubled. SIPC coverage is $500,000 for investments including $250,000 for cash. This is not if the value of investments goes down. The insurance is if the company where you hold your investments fails.
For example, if XYZ brokerage company where you held your investments failed, you would have coverage for up to $500,000. If you owned $1 million in investments and cash, you would recover only half of it.
Protecting yourself
Banks love to have you do all your banking and financial transactions through them. They want to be your one-stop shopping. Yet, if you are one who likes to keep cash in savings accounts, consider adding self-protection by diversifying. If you had two banks or a bank and credit union, if one of your financial institutions failed, you would still have access to the other banking accounts. Just remember, the “magic” number of $250,000 to keep all of it safe in the FDIC-insured institution.
CD Moriarty, CFP, is a Vermont-based financial speaker, writer and coach.
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