August 19, 2000

FDIC Deposit Insurance Tutorial

posted by MR WAVETHEORY at 8/19/2000 11:30:00 AM
The following is a tutorial on FDIC Deposit Insurance.

You can also watch the video tutorial on FDIC deposit insurance coverage

You can also read "How Much Money Will FDIC Insurance Protect?"
Hi Ashley.
Morning Grandpa.
How are you?
I'm fine.
So, how's the new job?
It's going great. In fact, they want me
to keep working part time when
classes start up again.
Oh, I hope they're paying you well for
all your hard work.
The pay is great. I just got paid
today, see?
Whoa, wonderful.
I do have one question, though.
Well, I realize this isn't a fortune or
anything, but I want to make sure I put
it some place safe. I was thinking
about opening an account at the bank,
but what if something happens to the
That's a good question.
In my finance course, I remember
reading something about Federal
Deposit Insurance.
That's right. Federal Deposit
Insurance Corporation, FDIC. We
can go down the bank this afternoon
and you can learn some more about it.
That is, after you take me to lunch.
Well, I can do that, now.
Oh, I'm just kidding, I want you to
put that in the bank where it belongs.
Then we'll go down and see your
mom's friend, Anita.
That's right; I forgot Anita works at
the bank. Okay, let's do it. And, I
know the perfect place for you to take
me to lunch.
Ashley, see this sign? That shows
your money's protected here.
Federal Deposit Insurance
Corporation. Oh, there's Anita.
So, what brings you two to the bank
Anita, Ashley has some questions
about FDIC insurance.
Sure, what's up?
Well, I'd like to understand how
FDIC Deposit Insurance works.
Does it mean that I can't lose any
Pretty much, unless you deposit over
a hundred thousand dollars with us.
What do you mean?
Well, the FDIC insures depositors for
up to a hundred thousand dollars,
sometimes even more.
You mean, if the bank loses my
paycheck, I get a hundred thousand
(Laugh) No, not exactly.
That's right, not exactly. The FDIC
preserves and promotes public
confidence in the U.S. financial system
by insuring deposits in banks and
savings associations. If your bank
were to fail, FDIC insurance would
cover your deposit accounts
dollar-for-dollar, including principal
and any accrued interest up to the
insurance limit. The FDIC is an
independent agency of the federal
government, created in 1933, in
response to the thousands of bank
failures that occurred in the 1920s and
early 1930s, when people lost their life
savings because there was no FDIC
program to protect their deposits. The
FDIC insures all types of deposit
accounts, including checking accounts,
NOW accounts, savings accounts,
money market deposit accounts,
Certificates of Deposit (CDs), and
retirement accounts. FDIC insurance
covers the total of all deposit accounts
you have at an insured bank, including
its branch offices, up to the FDIC's
insurance limit The basic insurance
limit is $100,000 per depositor, per
insured bank. If you or your family
has $100,000 or less in all of your
deposit accounts at the same insured
institution, you do not need to worry
about your insurance coverage. Your
funds are fully protected. There are
ways that you can have more than a
hundred thousand dollars on deposit at
one bank and still be fully insured, but
we'll talk about that a bit later. It's
important to remember that FDIC
insurance covers only bank deposits.
The FDIC does not insure the money
you invest in stocks, bonds, mutual
funds, life insurance policies, annuities,
or municipal bonds, even if you bought
these products at an insured bank.
The FDIC also does not insure U.S.
Treasury bills, bonds, or notes, but
these are backed by the full faith and
credit of the U.S. government. Nor
does FDIC insurance cover valuables
in safe deposit boxes. Rather, the
contents are covered either by the
banks private insurance or the box
holder's personal homeowner's
insurance. What would happen if your
bank ever fails? The FDIC would
either transfer your deposit account to
another FDIC insured bank, or give
you a check equal to your account
balance, including the principal and
interest accrued through the date of
the bank's closing, up to the insurance
limit. Historically, insured funds are
available to depositors just a few days
after a bank closing. Since the start of
the FDIC in 1933, no depositor has
lost a single penny of insured funds as
a result of a bank failure. So, if
Ashley's bank fails, she'll get her
money back, plus the accrued interest,
up to the insurance limit. This is paid
out of an insurance fund built up over
the years by the insurance premiums
that insured banks have paid to the
FDIC. There are ways that you and
your family can have more than
$100,000 on deposit at one bank, and
still be insured by the FDIC.
Additional coverage is available if your
deposit accounts are in different
account ownership categories. There
are four account ownership categories
that are most commonly used by
individuals and families. These are
single accounts, self-directed
retirement accounts, joint accounts,
and revocable trust accounts. We'll
start with single accounts. Let's say
that Ashley opens a $2,000 checking
account, a $5,000 savings account
and a certificate of deposit for
$10,000, all in her name at the same
bank. Since Ashley's deposits are all
single accounts, her coverage is easy
to calculate. We add them together,
and because they total $17,000, well
below the $100,000 insurance limit,
they are fully insured. Ashley's
neighbors, Doug and Sheila, already
have two single accounts at the bank.
Because the accounts are owned
individually, not together, the insurance
coverage for each of them is
calculated separately. Doug and
Sheila's single accounts total $30,000,
and $20,000, respectively. Since they
each have a single account that totals
less than $100,000, these accounts
are fully insured. Sheila and Doug also
have retirement accounts and joint
accounts, which we will discuss later.
Let's see why Doug and Sheila are at
the bank.
Good afternoon, Anita. Listen, if you
have some time, we'd like to talk to
you about opening up some new
But before we do that, can you check
the balance on our retirement
Sure, just give me a minute.
Deposits you have in self-directed
retirement accounts at an insured bank
are insured separately from your other
deposit accounts at the bank.
Self-directed means that you have the
right to choose how the money is
deposited or invested. Self-directed
retirement accounts, which include
traditional IRA's, Roth IRA's and
self-directed Keoghs, are added
together and insured up to $250,000.
Doug and Sheila found out that their
IRA's at the bank total $80,000 and
$65,000 respectively. Since Doug
and Sheila's IRA deposits are under
the insurance limit, their retirement
accounts are fully insured. It's also
important to know that the number of
beneficiaries you name on a
self-directed retirement account is
not a factor when it comes to
insurance coverage. Based on the two
account categories we've talked about
so far, single accounts and
self-directed retirement accounts,
Sheila and Doug could have up to
$700,000 of deposit insurance
coverage at the same bank. $100,000
each in single accounts and $250,000
each in retirement accounts. Now,
let's see what type of accounts Doug
and Sheila want to open.
Anita, we're thinking about opening up
another savings account in both our
Right, and we also want to open up a
CD in both our names.
Actually, you know what; we're not
sure, Anita. We already have two
joint accounts, our household checking
and savings accounts.
Mm hmm.
Thanks for reminding me,
we will need to look at those accounts
to make sure that you can open up
another joint account and still be
Oh, okay.
A joint account is a deposit owned by
two or more people. Corporations,
trusts, estates and partnerships are not
eligible for joint account coverage. To
qualify for joint account insurance
coverage, all co-owners must have
equal rights to withdraw funds from
the account. And all co-owners must
sign the account signature card, unless
the account is a CD, or is established
by a person acting on your behalf. If
these requirements are met, each
person's share of all accounts that he
or she holds jointly at the same bank,
is added together, and the total is
insured up to $100,000. Rearranging
the way the names are listed on an
account or using different social
security numbers doesn't increase
insurance coverage. If the same two
people have more than one joint
account at the same bank, they will get
no more than $200,000 of insurance
coverage for all their accounts
combined. That's $100,000 total for
each co-owner. Joint account
coverage is in addition to the coverage
provided for all the accounts that
Sheila and Doug hold in other
ownership categories at the bank, such
as single accounts and self-directed
retirement accounts. So Sheila and
Doug each can have $100,000 of
single account insurance, $250,000 in
self-directed retirement accounts, and
an additional $100,000 in coverage as
co-owners of joint accounts. That
means the two of them combined can
have up to $900,000 of insurance
coverage in those three account
ownership categories. To determine
joint account coverage, the total of all
joint accounts is divided according to
each person's ownership interest.
Unless the account records state
otherwise, the FDIC assumes it is an
even split. For example, Sheila has
one other joint account with her
daughter for $50,000. Sheila's
ownership interest in the joint account
with her daughter is $25,000, half of
the total deposit, because they both
have an equal interest. If Sheila and
Doug have a joint CD at the bank for
$200,000, the FDIC would determine
Sheila's joint account coverage by
taking her share of the joint account
with Doug, $100,000, and adding it to
her share of the joint account with her
daughter, $25,000, for a total of
$125,000 in joint accounts. Since this
amount is over the insurance limit,
Sheila would have uninsured funds of
$25,000. This uninsured amount
would not be covered by the FDIC if
her bank failed. Based on the three
account ownership categories we have
discussed so far, single accounts,
self-directed retirement accounts, and
joint accounts, Sheila and Doug
together could have up to $900,000 of
deposit insurance coverage. Let's see
what other questions Doug and Sheila
have for Anita.
Anita, we'd like to put $200,000 in a
joint account, with our children as
Now my friend said we should ask
about a payable on death or POD
account, because it can be insured
even though our joint accounts are
already at the insurance limit.
Right, but can we really do this?
Yes, you can do this. Because
technically, you'll be opening a
revocable trust account, not another
joint account. Now, when you open a
POD account, you're actually
establishing an informal revocable
trust, providing that the funds on the
account will belong to your
beneficiaries when you both die.
Now, this allows you to qualify for
insurance coverage in the revocable
trust ownership category.
A payable-on-death or POD account
is a form of revocable trust. This
informal revocable trust is created
when the account owner signs an
agreement with the bank, usually on
the account signature card, stating that
the funds in the account will belong to
one or more beneficiaries when the
account owner dies. These accounts
are set up so the owner can revoke
them at any time. And the owner has
full use of the account as long as he or
she is alive. The beneficiaries will get
what's in the account when the owner
dies. These accounts are also called
Totten trusts or testamentary accounts.
POD accounts are insured separately
from Sheila and Doug's single
accounts, self-directed retirement
accounts, and joint accounts, but only
if certain requirements are met. One
requirement is that the beneficiaries
must be the owner's spouse, child,
grandchild, parent or sibling. Adoptive
and step relationships, such as step
parents, adopted children and
half-siblings, also qualify. Beneficiaries
who meet this relationship requirement
are known as qualifying beneficiaries
because the account will not qualify for
insurance coverage in the revocable
trust ownership category, unless this
relationship requirement is met. Other
relatives, including in-laws, cousins,
nieces and nephews, are not qualifying
beneficiaries. Also friends and
organizations, including charities are
not qualifying beneficiaries. A POD
account with no qualifying
beneficiaries is insured as the owner's
single account. It would be combined
with the depositor's other single
accounts at the bank, and the total
would be insured up to a maximum of
$100,000. Another requirement for
separate insurance coverage of POD
accounts is that all beneficiaries must
be identified by name in the account
records of the insured bank. Also, the
account title must indicate the
existence of a trust relationship.
Usually, this requirement is met by
including a term such as payable on
death, in trust for, as trustee for, or a
similar phrase or an acronym, such as
POD, ITF, or ATF. When all these
requirements are met, each owner of a
POD account is insured up to
$100,000 for each qualifying
beneficiary. This insurance is separate
from any coverage that the owner may
have in another account ownership
category. For example, if Doug and
Sheila decide to set up a POD
account with their three children as
equal beneficiaries, the account could
be insured up to $600,000. Doug and
Sheila each would be insured for
$300,000, because they each have
named three qualifying beneficiaries.
Based on the four account ownership
categories we have discussed so far,
Doug and Sheila could have up to
$1.5 million dollars fully protected by
the FDIC. They could do this by
placing their deposits in the four
account ownership categories that we
have covered: single accounts,
self-directed retirement accounts, joint
accounts and POD accounts.
Thanks, Anita. That's a lot of good
information about how revocable trust
accounts and all other accounts are
You know what, Anita, I just
remembered something. Our attorney
told us that we should look into setting
up a living trust - that we could use to
put money aside at the bank, uh, for
our kids. Um, do you know much
about these living trusts and how
they're insured?
A living trust, sometimes called a
family trust, is another kind of
revocable trust. A living trust is a
formal revocable trust because it is a
formal, legal document prepared by an
attorney. The owner, also known as
the grantor or settlor, specifies the
beneficiaries, who will receive the trust
assets when the owner dies. It's also a
revocable trust, because the owner
keeps control of the trust assets during
his or her lifetime, and can change the
trust at any time. And as with POD
accounts, deposit insurance coverage
is determined by the number of
qualifying beneficiaries that each
owner names. An important point to
understand is that the $100,000 per
qualifying beneficiary insurance limit
applies to all revocable trust accounts
that a depositor has at the same bank.
For example, if Sheila and Doug have
a POD account naming their three
children as beneficiaries, and they also
have a living trust account naming the
same three beneficiaries, the funds in
both accounts would be added
together and the total insured up to
$600,000: $100,000 per owner, per
qualifying beneficiary. The POD
account would not be insured
separately from their living trust
account. Basically, the rules for
insurance coverage of living trust
accounts are the same as for POD
accounts, but because a living trust
usually has terms and conditions that a
POD account doesn't have, depositors
may want to obtain assistance from
their legal or financial advisor, or
contact the FDIC for guidance on their
insurance coverage. Yet another
account ownership category is an
irrevocable trust account. With an
irrevocable trust, the trust owner gives
up all power to cancel or change the
trust. Like living trusts, the amount of
insurance coverage for an irrevocable
trust account depends upon the
specific terms and conditions of the
trust agreement. Owners of an
irrevocable trust may want to obtain
assistance from their legal and financial
advisor, or contact the FDIC for
guidance on their insurance coverage.
The FDIC also provides separate
deposit insurance coverage for
business accounts. But some special
rules apply. Businesses operated as a
sole proprietorship are not eligible for
business account coverage. The
accounts of a sole proprietorship are
insured as the business owner's single
accounts. For example, suppose that
Doug is a sole proprietor, and he
keeps his business accounts in the
same bank where he keeps his
personal funds. Because he is a sole
proprietor, his business accounts are
combined with his single accounts at
the same bank, and insured up to a
total of $100,000. But what if Doug
decides to run his business as a
corporation or a partnership, not as a
sole proprietorship? Corporations
and partnerships are separate legal
entities, so the accounts of the
corporation or partnership would be
insured up to the $100,000 limit and
not as Doug's personal funds. In fact,
the deposits of a corporation,
partnership or an unincorporated
association, just about any
organization except a sole
proprietorship, can qualify for
coverage as a business account. The
$100,000 insurance limit would apply
to all deposits the business or
organization has at the same bank.
This coverage would be separate from
the coverage of the personal funds of
any individual associated with the
business or organization. Most of us
have a good understanding of a
corporation and a partnership, but
what are some examples of
unincorporated associations? They
include churches and other religious
organizations, community and civic
organizations, social clubs and
foundations. To obtain separate
deposit insurance, a corporation,
partnership or unincorporated
association must be set up for the
purpose of doing business, not just to
increase the FDIC coverage for the
owner's accounts. Another type of
account that is separately insured by
the FDIC is an employee benefit plan,
such as a pension plan for a
company's workers. Sheila
participates in the pension plan at the
office where she works. The plan has
a deposit account at the bank covering
19 employees. Each employee's share
can be separately insured up to
$100,000, provided certain conditions
are met by her employer and the bank.
Sheila's share of the pension plan also
would be insured separately from any
other deposits she might have in the
same bank, including her IRA. And
she doesn't have to be vested in the
pension plan for her share to be
covered by the FDIC insurance.
FDIC insurance also covers the
deposit accounts of government
bodies, from the U.S. government to
states, counties, cities, municipalities
and school or water districts. Deposits
of Indian tribes, Puerto Rico and other
territories are also FDIC insured.
Anita, this has been very informative.
That's for sure. I knew that the
federal government insured bank
deposits, but I never really thought
about how the FDIC protects our
money. And I definitely didn't know
that it was possible to have more than
$100,000 insured by the FDIC at one
And remember, if you ever need any
information or guidance on how the
FDIC insures your money at the bank,
you can always call the FDIC toll free,
or write the FDIC, or send the FDIC
an email, or you can go the FDIC's
web site.
For more information from the FDIC,
call toll-free, 1-877-ASK-FDIC.
That's 1-877-275-3342 from 8 AM
until 8 PM, Eastern Time, Monday
through Friday. For the hearing
impaired line, call 1-800-925-4618.
Send your question by email using the
FDIC's online customer assistance
form at Mail
your question to FDIC, Attention:
Deposit Insurance Outreach, 550 17th
Street North West, Washington DC,
20429. You can read more about
FDIC insurance online at At the FDIC home
page, click on Deposit Insurance, then
click on, "Are My Deposits Insured?".
Listed here are FDIC's Deposit
Insurance Resources. You can
calculate your insurance coverage
using the FDIC's Electronic Deposit
Insurance Estimator - Online Version,
or Electronic Deposit Insurance
Estimator - Banker Version. You can
view FDIC's two deposit insurance
publications: "Insuring Your Deposits,
The Basic Brochure", and "Your
Insured Deposits: FDIC's Guide to
Deposit Insurance Coverage", which is
a comprehensive guide. Additional
resources include, "Tips For
Certificate Of Deposit Savers", and
"FDIC's Consumer News".
Okay, Grandpa, thanks for taking me
to the bank today. I'll see you
tomorrow, alright?
Where are you off to?
I've got to go to work. I have to
keep earning money for all those bank
accounts I want to open.
Bye, bye.
Bye, honey. Take care.