What you need to know now about FDIC insurance

California-based IndyMac Bank failed in July, leading many bank customers to wonder how safe their money really was. For most, the answer is extremely safe. Prior to 1934, bank failures often meant disaster for depositors, but the Federal Deposit Insurance Corp. (FDIC) now guarantees most bank deposits.

As crucial as FDIC insurance is for our financial security, few Americans know very much about it — and what they don’t know could cost them a bundle. Bottom Line/Personal asked top financial analyst Greg McBride for details…

Do bank customers need to worry about money they have in banks?

The vast majority do not. The only people who should worry at all are those whose accounts at any single bank exceed the limits of FDIC insurance — $100,000… or $250,000 for certain retirement accounts, such as IRAs held in certificates of deposit (CDs) and money-market accounts. Stay below these limits, and 100% of your deposits are completely protected even if the bank fails.

What should people do if they want to keep more in a bank?

The easiest way around the rules is to divide your money among several banks — that means among different bank companies, not just several branches of the same bank. FDIC insurance covers up to $100,000 (or up to $250,000 in some retirement accounts) at each bank with which you do business.

If you prefer to keep more than $100,000 in a single bank, you still can be 100% covered by FDIC insurance as long as you divide your money among several “ownership categories.” Ownership categories include personal accounts in your name… personal accounts in your spouse’s name… joint accounts co-owned by you and someone else (such as your spouse)… and trust accounts naming someone other than yourself as trust beneficiary.

Example: With proper planning, a married couple can deposit more than $1 million in a single bank with all of the money insured by the FDIC. Each spouse can put $100,000 in an account in his/her own name… each can have $250,000 in a retirement account… the couple can co-own a joint account up to $200,000… and each can have a trust containing $100,000 that names the other spouse as the beneficiary. Total: $1.1 million.

Which types of bank accounts are protected by the FDIC, and which types are not?

Checking accounts, savings accounts, CDs, Christmas club accounts and money-market savings accounts are covered by the FDIC.

Investment products, such as stocks, bonds and mutual fund shares (including money-market mutual fund shares) are not covered even if they were purchased through an FDIC bank.

The Securities Investors Protection Corporation (SIPC), an organization unrelated to the FDIC, does protect investors when brokerages, including bank brokerages, fail. Look for the phrase “Member SIPC” on bank signs… ask your bank’s brokerage department whether the bank (or the subsidiary that holds investments) is a member of the SIPC… or contact the SIPC to check membership (202-371-8300, www.sipc.org). Note: SIPC coverage does not protect investors from losses from market fluctuations.

Aside from not knowing the rules, what are other ways that customers wind up with uncovered deposits?

People sometimes purchase “brokered CDs” — CDs sold through investment brokers — without realizing that these CDs will be placed with a bank at which they already have accounts. If the CD and these other accounts total more than $100,000, they might not be completely covered. Ask where a brokered CD will be placed before buying.

Others put money into interest-bearing accounts right up to the FDIC limit. Then the interest earned by these accounts pushes them over the limit and leaves them less than fully covered.

Is money in a credit union or a savings and loan as safe as in a bank?

Yes. Most savings-and-loan deposits are FDIC insured. Most credit union deposits are covered by the National Credit Union Share Insurance Fund, which is essentially identical to FDIC insurance (www.ncua.gov, and click on “Share Insurance”).

How long after a bank fails do depositors have to wait to receive their money from the FDIC?

You may be hearing the myth that it takes months for the FDIC to pay up, but in truth, depositors usually have full access to their money by the next business day after a bank is closed by regulators. Typically, failed banks are closed on Fridays, and funds are fully available by the following Monday. Even during that weekend, bank customers generally can use their ATM cards and write checks, though they might not be able to use on-line banking services. (Deposited funds held through brokered accounts or trusts might take slightly longer to become fully available.)

Do bank customers who exceed FDIC limits lose all of their uncovered funds when their banks fail?

They are likely to recover a portion of their uncovered money after the bank’s assets are sold, but probably not everything. Historically, they can expect to receive around 70 cents on the dollar, though this varies.

Do you expect many more bank failures in the months ahead?

There will be more failures as banks cope with bad mortgages and other failed loans, but keep this in context. For this year, as of late July, only seven out of 8,500 US banks have failed. The vast majority remain financially sound.

For more information: Call 877-ASK-FDIC, or go to www.fdic.gov.

Source: Greg McBride, CFA, senior financial analyst for Bankrate.com, a personal finance Web site based in North Palm Beach, Florida. He often is called on by cable and network television to be a broadcast commentator providing financial analysis and advice.