FDIC Misconceptions: A Top 10 List (Part I)
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.
1. The most a consumer can have insured is $100,000.
Too many people assume – often incorrectly – that if their bank fails their share 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 $1000,000 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 $100,0000 for each beneficiary if certain conditions are met. 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.”
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.)
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.
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.
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. “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.”