In the five years leading up to 2008, the United States saw just 10 bank failures. Due largely to the 2008 Financial Crisis, 465 banks shut down from 2008 to 2012, according to the Federal Deposit Insurance Corporation (FDIC). One major impact of the Financial Crisis on the banking industry was an increase in the insured account limit by the FDIC, but what should you do if you deposit more than the limit? Let’s look at some of your best options to keep your money safe from the risks of uninsured losses should your bank close its doors.
Understand Your Current FDIC Insurance Limits
The FDIC raised the insurance limit to $250,000 per depositor per bank and ownership category. If you have an account owned by just you, it is insured to $250,000. If you hold a joint account, that insurance will double to $500,000, as it is insured to $250,000 per account holder. While these are the most common scenarios, there are options to get more insured coverage.
By combining accounts owned by just you, just your spouse (if married), and jointly, you can get $1 million in insured coverage spread over three accounts. This helpful table from the FDIC helps explain additional details to help you maximize your coverage.
Because coverage limits are per bank, you can open similar accounts at other banks for the same limits. If you do this at five banks with a spouse, you can easily get $5 million in FDIC coverage. Online banks make the process even easier. However, that still may be a bit more work than you want to put in. If that’s the case, these alternatives help you ensure excess bank deposits without opening a laundry list of bank accounts.
CDs and CDARS for Maximum FDIC Coverage
You can find a handful of companies willing to put your cash in a variety of CDs, money market, and savings accounts under your name for a fee to ensure you get enough coverage from the FDIC to protect your entire nest egg.
One of the most popular and best-known services to spread your deposits across banks is CDARS or the Certificate of Deposit Account Registry Service. CDARS works with a network of banks to keep your money insured in accounts under the $250,000 limit. If your cash assets are in the millions, the convenience may be worth it.
If the idea of keeping your money locked away in CDs doesn’t sit right with you, consider alternative Impact Deposits. This similar service puts funds in community banks and financial institutions that lend to local non-profits. It also has a positive social mission that high-net-worth depositors can feel good about supporting.
Both of these services give account holders a single deposit account with just one 1099 form and one point of contact.
Other Insurance and Bank Deposits
Traditionally available in the Chicago and Milwaukee markets, Wintrust Financial offers another trusted option to spread out deposits for maximum FDIC coverage with a new nationwide focus. Wintrust owns a network of 15 chartered banks and offers insurance up to $3.75 million for an individual depositor.
Some depositors choose more creative solutions to keep their money safe. For example, Massachusetts offers insurance for bank deposits over the FDIC limit. There is technically no limit to the state insurance for deposit accounts through the Depositors Insurance Fund (DIF).
While many banks in the state are available only for locals, a range of Massachusetts banks would be thrilled to take your deposit from any US state. According to its 2019 Annual Report, the DIF covers 49 banks and insures $16.4 billion in excess deposits over the FDIC limit.
Using Credit Unions for Excess Funds
Also, keep in mind that non-bank accounts get coverage as well. Credit unions offer similar coverage to the FDIC through their own regulator, the National Credit Union Administration (NCUA). The Securities Investor Protection Corporation (SIPC) fills that role for investment accounts, but with slightly different limits and rules.
Because investments can lose value, SIPC coverage clearly states that you are not covered for losses from bad investment decisions. However, it does cover up to $250,000 in cash per account and $500,000 per customer for all accounts at a financial institution. If you already have investment accounts at a favorite brokerage or two, they can add extra cash deposit insurance.
Don’t Lose Cash to Bank Failures
In 2007, I saw a customer deposit a check in the bank for $2 million. They were moving the cash from an account at Countrywide Bank to a stable regional bank in an era where it looked like Countrywide wouldn’t make it through the financial crisis. She was right. Countrywide was acquired by Bank of America in January 2008 but was in danger of collapse; the woman's money was safe because she planned ahead.
Don’t fall into a trap of a false sense of security. Get your cash and excess deposits insured so they are safe no matter what the economy decides to do next.