This may be the most asked question since Silicon Valley bank SIVB, which failed last week. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to protect your banking money after the stock market crash of 1929 and subsequent bank failures. At this time, the FDIC supervises and insures more than 5,000 banks. Receiverships like those of a Silicon Valley bank are rare. According to the FDIC, in 2021 and 2022, there were no failed banks. This was unusual, as there have been a handful of bank failures over the years. The size of this is what caught everyone’s attention and reminds us to consider where our cash is kept. NoSee: FDIC Failed Bank List I learned how FDIC insurance works in the late 80’s. In late December, a regional bank went belly up. My point? The company I worked for kept all their money in that bank and gave me a paycheck. I was able to deposit it, but the check bounced. This left me with several overdrafts as I paid my monthly rent, utilities and other bills before going on a New Year’s ski trip. The FDIC insured the bank and the company I worked for went whole. The company refunded me for the overdraft and the paycheck was reissued from their new bank. The cost of operating an FDIC-insured bank saved my day and my pocketbook. Not to mention my job, because the company stayed in business. How much of your money is safe? When it comes to the FDIC, insurance is $250,000 per account holder at an FDIC insured bank. You don’t buy insurance, the bank does. You are automatically covered when you have savings at an FDIC-insured bank. Checking, Savings, CDs are insured up to $250,000 per person, not per account; However, there are cash-saving strategies that create more coverage. If you have a joint account, you are both covered for $250,000, for a total of $500,000. Another strategy is to set up your account as paid on death (POD), since the FDIC also insures your beneficiaries. A client of mine regularly kept $500,000 in his savings account to feel comfortable. She directed the bank to add a POD designation to her account so that the cash would go equally to her three children upon her death. The FDIC insures up to $250,000 per beneficiary, so the move also increased her insurance (3 x $250,000 coverage was added). . This beneficiary effect also applies to revocable trust beneficiaries, although as of April 1, 2024 coverage will be maximum at $1,250,000 for the trust. Your retirement accounts at the bank are also insured up to $250,000 as long as they are in a cash account, not an investment account with a bank affiliate. The FDIC goes beyond giving bank depositors peace of mind by inspecting and supervising banks to help prevent their need for insurance. They also take receivership of failed banks. Additionally, they have consumer programs including Money Smart, a financial education resource. Silicon Valley Bank and other banks that failed this past week will still be able to access their cash through the FDIC, the government says. WSJ’s Imani Moise joins host JR Whalen to discuss. Photo: Getty Images
Other insurance for your cash Other financial institutions also have insurance. If you have money in a credit union, they are insured by the National Credit Union Administration (NCUA). NCUA was established in 1970 to insure and supervise member credit unions. Their insurance coverage limit is also $250,000 on your cash account and works the same as the FDIC. The Securities Investor Protection Corporation (SIPC) covers brokerage firms when they are in financial trouble. SIPC coverage for investments is $500,000, including $250,000 for cash. This is not the case if the value of the investment goes down. There is insurance if the company you hold your investment in fails. For example, if the XYZ brokerage company where you made your investment fails, you will have coverage of up to $500,000. If you have $1 million in investments and cash, you will only recover half of that amount. Protect yourself Banks like you to do all your banking and financial transactions through them. They want to be your one-stop shopping. However, if you prefer to keep cash in a savings account, consider adding self-protection by diversifying. If you have two banks or a bank and credit union, if one of your financial institutions fails, you will still have access to the other banking accounts. Just remember, $250,000 is the “magic” number to keep it all safe at an FDIC-insured institution. CD Moriarty, CFP, is a financial speaker, author and coach based in Vermont. Related Articles: With interest rates incredibly low and the stock market doing so well, how much should I keep in liquid assets? Amid bank failures, savers consider extending deposit protection beyond $250,000
