The 15-Minute Tip: Staying Under the FDIC Umbrella

Many of you responded to my previous column about how some "Millionaire Zone" investors are buying safe but high-yielding CDs during the credit crisis and many of those responses were questions — and frankly, some misperceptions — about how FDIC protection works for those deposits.

So I thought a 15-minute explanation of how deposit insurance works — and the handy resources provided by the Federal Deposit Insurance Corporation — would be worthwhile.

As advertised, FDIC insurance covers time deposits — at a chartered bank or savings institution — in the amount of $100,000 per depositor, per institution.

So what if you're lucky enough to have half a million or more, and you'd like to take advantage of yields exceeding 5% on some CDs, while sleeping at night knowing that your investments are safe? Turns out, you can, if you play the FDIC game to its fullest.

On the surface, it would appear that $100,000 coverage per depositor, per institution, is fairly limiting. But within that framework, there are ways to define "depositor" to fit your needs. "Playing the game" to cover amounts beyond the maximum thus means creating different kinds of "depositors" and spreading deposits across institutions.

Rules of the game

The rules of thumb about FDIC insurance coverage are fairly easy to grasp, but you should always check out your situation against the nuances and finer points. Each of the following is entitled to a separate and additional coverage:

Individual accounts

Every individual, as defined by FDIC rules, gets coverage. Deposit $100,000 in Bank A and you get one coverage. Simple. Your spouse deposits another $100,000 in the same bank, and he/she gets another $100,000. Footnote: using different names or setting up separate accounts won't work. Also note that coverage is per institution. That rules out another branch of the same bank, or even its Internet-based arm. It must be a separately chartered company, although in some cases it can be within the same bank holding company. If in doubt, check for separate FDIC chartering.

Joint accounts

In a clearly titled joint account, each joint owner is entitled to $100,000 coverage. The accounts are assumed to be divided equally. So if you and your spouse open a joint account, in both names, in addition to your separate accounts, you get another $200,000 in coverage — $100,000 for each of you. Now, we're up to $400,000 in total coverage — in just one institution. Trust accounts.

Next, an account set up and titled in a living or irrevocable trust gets coverage too. Beneficiaries must be qualified — a named spouse or family member with clear beneficiary "payable on death" status written into the trust. So set up a living trust with your spouse as beneficiary for another $100,000 in coverage. We're up to half a million. Self-directed IRAs. Separately titled self-directed IRA accounts are covered up to $250,000 each. (I overlooked this in my previous column.)

Play the game with one each of the above accounts, and you'll fetch $750,000 in coverage — at just one institution. Repeat the process elsewhere — you get the idea.

If a bank fails

Some column responders expressed concern about how and when you'd be paid if your institution failed — suggesting it could take years of red-tape entanglement.

From the FDIC Web site: "Federal law requires the FDIC to make payments of insured deposits 'as soon as possible' upon failure of an insured institution...[i]t is the FDIC's goal to make deposit insurance payments within one business day of the failure of the insured institution."

Enough said.

Introducing 'EDIE'

I found the FDIC Web site particularly well organized and helpful. The FAQ page is great, with separate and more detailed sections tied to each form of ownership.

Also good is the EDIE — Electronic Deposit Insurance Estimator — simulator. EDIE lets you check your current or proposed deposit "scheme" against the rules, telling clearly what is and isn't covered.

OK — maybe more than 15 minutes: but all worthwhile for peace of mind.