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Important Update: Changes in FDIC Deposit Insurance Coverage

The FDIC deposit insurance rules have undergone a series of changes starting in the fall of 2008. As a result, certain previously published information related to FDIC insurance coverage may not reflect the current rules. For details about the recent changes, visit Changes in FDIC Deposit Insurance Coverage. For more information about FDIC insurance, go to www.fdic.gov/deposit/deposits/index.html or call toll-free 1-877-ASK-FDIC (1-877-275-3342). For the hearing-impaired, the number is 1-800-925-4618.

Spring 2006

Misconceptions: A Top 10 List

To help depositors avoid repeating the mistakes of others, FDIC Consumer News has compiled this "Top 10" list of misconceptions that some people have about FDIC insurance. This list is based on discussions with FDIC deposit insurance specialists, including representatives at our toll-free Call Center, which handles hundreds of calls a month from consumers asking about their deposit insurance.

Misconception Number 1: The most a consumer can have insured is $100,000.

Too many people assume — often incorrectly — that if their bank fails their share of all their accounts would be added together and insured up to a combined total of $100,000. Others have notions even further from the truth, such as the idea that the FDIC knows how much each customer has in every bank in the United States (rest assured, we don't) and that the grand total of all those accounts is insured to no more than $100,000. 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."

Suppose you have a variety of accounts at one bank. The funds you have in various checking and savings accounts (other than retirement accounts) in your name alone are insured up to $100,000. Your portion of joint accounts — those with other people — is also separately insured to $100,000. If you also have "revocable trust accounts" at the bank, the total can be separately insured up to $100,000 for each beneficiary if certain conditions are met. (See "misconception number 8.") And, under new rules, certain retirement accounts are insured up to $250,000, up from $100,000 previously.

"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."

Misconception Number 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.

"Consumers are always telling us that they thought they could get more coverage if they did something like title one account for 'Mary and John Smith' and another account for 'Mary or John Smith,'" said 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. The FDIC will simply add each person's share of all the joint accounts at the same institution and insure the total up to $100,000." (Note: Each person's share is presumed to be equal unless stated otherwise in the deposit account records.)

Misconception Number 3: If a bank fails, the FDIC could take up to 99 years to pay depositors for their insured accounts.

This is a completely false notion that many bank customers have told us they heard from someone attempting to sell them another kind of financial product.

The truth is that federal law requires the FDIC to pay the insured deposits "as soon as possible" after an insured bank fails. 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.

Misconception Number 4: The FDIC only pays failed-bank depositors a percentage of their insured funds.

All too often we receive questions similar to this one: "Is it true that if my FDIC-insured bank fails, I would only get $1.31 for every $100 in my checking account?" As with "misconception number 3," this misinformation appears to be spread by some financial advisors and sales people.

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. However, the overwhelming majority of depositors at failed institutions are within the insurance limit, and insured funds are always paid in full.

Misconception Number 5: Deposits in different branches of the same bank are separately insured.

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.

Distinguishing one bank from another isn't easy these days. Some banks have similar names but they're not the same institution. And then there are banks that use different "trade" names in different parts of the country or use a different name for their online banking activities or Internet divisions, but they're all the same bank for FDIC insurance purposes. The FDIC and other federal regulators have advised banks to clearly identify their legal names in advertisements and on Web sites.

When in doubt, you may contact the FDIC (see the next page). "One way to be extra sure you are depositing money in different banks is to ask the FDIC for each bank's insurance 'certificate number,'" noted Williams. " If the FDIC certificate numbers are different, the banks are different."

Misconception Number 6: Any product sold by a bank is insured by the FDIC.

You know the FDIC insures deposits, such as checking accounts and certificates of deposit (CDs). But in recent years banks also have been offering an array of financial products — including stocks, bonds, mutual funds, annuities and other insurance products — either directly or through other companies. These other products are not FDIC-insured — even if they were sold by a bank — and in some cases they could lose value.

To help minimize confusion, federal regulators require FDIC-insured institutions offering or advertising an investment to a customer to disclose that the product is not FDIC-insured, is not guaranteed by the bank or savings institution, and is subject to investment risk, including the possible loss of principal (the money invested).

Misconception Number 7: Each beneficiary named on an IRA (Individual Retirement Account) increases the FDIC insurance coverage.

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, as described below.

Under the FDIC's new rules that became effective April 1, 2006, up to $250,000 in insurance is provided for the deposits a consumer has in a variety of retirement accounts, primarily traditional and Roth IRAs, at one insured institution. The previous coverage limit in this category was $100,000. For more details, see FDIC Insurance: What's New, What's Not.

Misconception Number 8: Revocable trust accounts are always insured up to $100,000 for each beneficiary.

No, not always. A revocable trust account — typically a payable-on-death account or a "living trust" account — is one in which beneficiaries will receive the funds upon the owner's death but the owner (depositor) retains the right to change or revoke the trust. "Although a revocable trust account is insured to the owner, the insurance coverage is based on the interests of the beneficiaries who are entitled to receive the money when the owner dies," explained Nagle.

In general, the owner of revocable trust accounts at a bank is insured up to $100,000 per beneficiary but — and this is important — that is only for "qualifying" beneficiaries under the FDIC's rules. Who qualifies? A depositor's spouse, child, grandchild, parent or sibling, including step-parents, step-children and adopted children. But other relatives, such as nieces, nephews, cousins or in-laws, as well as friends, organizations (including charities) and other entities do not qualify. The portions of the trust payable to any non-qualifying beneficiaries would be insured as the personal funds of the owner up to $100,000 along with any deposit accounts he or she alone has at the same bank.

Our deposit insurance specialists often get calls that go like this: "I've got revocable trust accounts naming five beneficiaries — two nieces, two nephews and a friend. That means I have up to $500,000 in FDIC coverage, right?" The correct answer here is: No — your coverage is $100,000, along with any accounts you own alone (other than retirement accounts) at the bank. That's because nieces, nephews and friends aren't qualifying beneficiaries.

The $100,000 coverage per qualifying beneficiaries presumes equal shares of the trust. If that's not the case, the calculation of coverage becomes more complex. "Consider a father's revocable trust that gives 60 percent to a daughter and 40 percent to a son," said FDIC Senior Consumer Affairs Specialist Martin Becker. "If the trust has $200,000 on deposit at a bank, the daughter's $120,000 share would be insured for $100,000 and the son's $80,000 share would be insured in full, resulting in total coverage of $180,000, not $200,000." For more information, consult the FDIC.

Misconception Number 9: Revocable trust accounts are insured up to $100,000 for each owner and each beneficiary.

As noted, each depositor's revocable trust accounts at a bank are insured up to $100,000 per qualifying beneficiary. But some people incorrectly assume that the coverage is based on the total number of depositors and beneficiaries.

Let's say an owner of a revocable trust names his or her child as the only beneficiary. Some people assume the account is covered up to $200,000 ($100,000 for the depositor and $100,000 for the beneficiary). But actually, the FDIC coverage is up to $100,000 for the one qualifying beneficiary. According to Williams, "This often comes as a surprise to depositors who will respond, 'What about me? Don't I get any coverage?' I tell them that the owners are covered, but coverage is based on the number of qualified beneficiaries."

But also consider this example. A family has a living trust account with two owners — a husband and wife — and they name their three children as the beneficiaries. Some people would guess that because there are five names on the account, FDIC coverage is for $500,000. In fact, the FDIC would cover this account up to $600,000 — $300,000 for the husband's funds payable to the three beneficiaries and $300,000 for the wife's funds payable to the same three beneficiaries (assuming that the shares of the three beneficiaries are equal).

Misconception Number 10: An account for a deceased person's estate is insured up to $100,000 for each person who will inherit money from the estate.

Many people hear about the FDIC having per-beneficiary coverage for trust accounts and automatically assume that a deceased person's estate account will be protected by the FDIC for up to $100,000 per heir. But that is only the case for deposits in revocable trust accounts with qualifying beneficiaries (as well as certain irrevocable trust accounts, which we haven't addressed here). Under the FDIC's rules, an estate account is insured along with any individually owned account of the deceased person (any checking accounts or CDs the person owned by himself or herself, and not including IRAs) and the grand total would be insured to $100,000.

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Last Updated 01/22/2009 communications@fdic.gov