Certificates of Deposit

Are your CDs as safe as you think?

Over the past few years, depositors have lost nearly $245 million when their banks failed. Why? Because they exceeded the $100,000 limit of the Federal Deposit Insurance Corporation. Perhaps they got a little careless when looking for a high rate certificate of deposit or the highest money market rates.

First you see it ... then you don't!

You may have heard that the financial bailout bill signed by President Bush on Friday, October 3, 2008, increases FDIC insurance from $100,000 to $250,000.

Well, it does ... sort of. Once again, Congress has played with smoke and mirrors and expects the American public to fall for it ... hook, line and sinker!

What in the world are we talking about? The increase in FDIC insurance from $100,000 to $250,000 is TEMPORARY!

The increase took effect October 1, 2008, and EXPIRES on December 31, 2009, just 15 months later.

Our recommendation? Exactly the same as we describe below. That is, except for certain types of retirement plans, DON'T keep more than $100,000 in any account at any time. Don't hope that Congress will extend the higher limit after December 31, 2009. The ONLY thing we know for certain is that the higher limit VANISHES on New Years Day, 2010.

Unless your bank is ultra-safe, never keep more than $100,000, including interest, in any FDIC insured account. (Note: For some retirement accounts, the limit is now $250,000.) That includes all of the interest you will earn when your CD matures.

For example, if you purchase a 3-year CD earning 5% interest annually, and compounded daily, don't invest more than $86,072 in that CD if you want the interest to accumulate until maturity. It will grow to $100,000 when it matures in 3 years, and all of your money will have been fully protected by FDIC insurance throughout your investment period.

On the other hand, if you invest a full $100,000 into the same CD, with interest left to accumulate until maturity, you risk losing as much as $16,200 in uninsured interest if the bank fails. In our opinion, this is an unacceptable risk.

But, if you purchase the same CD for $100,000 and have the interest mailed to you monthly, the total amount not covered by FDIC insurance is only $416.67, your monthly interest earnings. To us, that is an acceptable risk because many banks offer the best interest rate for CDs with a deposit of $100,000 or more. (Actually, if your bank fails, you could lose a few months of interest while the FDIC sorts out the details and reimburses the bank's depositors; once again, that is still an acceptable risk.)

Multiple accounts

As you may have noticed, we spoke above about a single account at one bank (one CD = one account). However, many people today have multiple accounts at the same bank. If this describes you, it is important to remember that the FDIC's insurance limit is not a "per person or per depositor" amount. It is also not a "per account" limit. Instead, it is "per depositor per TYPE of account."

Four types of accounts are eligible for FDIC insurance, the maximum dollar limit for each type being:

Single ownership accounts — $100,000 per depositor. This is sum of all checking accounts, savings accounts, CDs, etc., owned by the depositor.

Joint ownership accounts — $100,000 per depositor. This is sum of all checking accounts, savings accounts, CDs, etc., owned jointly by a depositor.

Certain retirement accounts — $250,000 per depositor. This is sum of all eligible retirement accounts, such as IRA and self-directed Keogh plans.

Testamentary (revocable trust) account — $100,000 per beneficiary named for each account, with the amount held in the account being paid out to the beneficiary upon the depositor's death, usually to one of the depositor's children.

But, there are many different ways — all perfectly legal — to structure account ownership so that a depositor can be fully insured for many times the $100,000 limit at a single financial institution if the accounts are set up properly. The examples below are based on the FDIC's online booklet, Your Insured Deposit.

A widow with 3 living children can set up the following fully-insured accounts at one bank and be fully protected with as much as $650,000 of FDIC insurance.

Single ownership accounts — $100,000 insurance maximum for all accounts combined in this category.

Retirement accounts — $250,000 insurance maximum for all accounts combined in this category.

A testamentary (revocable trust) account — $100,000 FDIC insurance maximum for each child; $300,000 in total.

A husband and wife with 2 living children can set up the following accounts at one bank and be fully insured with up to $1,500,000 of FDIC insurance.

Single ownership accounts — The $100,000 insurance maximum for all accounts in this category applies to each person; the husband and wife's total protection is $200,000.

Retirement accounts — Another $250,000 insurance maximum applies to each person; their combined protection is $500,000 for this type of account, giving them a total of $700,000 of FDIC insurance up to this point.

Joint ownership accounts — Another $100,000 insurance maximum applies to each person; again, their combined protection is $200,000, increasing their total FDIC insurance up to $900,000.

The husband and wife can each establish their own testamentary (revocable trust) account, naming their spouse as beneficiary. — Another $100,000 FDIC insurance maximum for each beneficiary; once more, their combined protection for this type of account is $200,000, increasing their total FDIC insurance coverage to $1,100,000.

The husband and wife can each also establish a separate testamentary (revocable trust) account, payable upon death, for each of their 2 children. — This adds another $100,000 FDIC insurance maximum for each child for each account for a total maximum of $200,000 per child. Now, the couple's accounts would be fully insured by the FDIC for a maximum of $1,500,000.

There are other ways to set up multiple fully-insured accounts in a single financial institution. But once again, it must be done carefully to preserve full FDIC insurance protection. Surprisingly, your financial institution may not be your best source of help. Instead, we recommend that you obtain the help of a qualified advisor such as an attorney who specializes in estate or elder law.

Finally, you should re-examine your accounts periodically. Several factors, such as a change in your family (a birth, death, marriage or divorce), can change your FDIC insurance coverage. And, if your financial institution merges with another one where you also have accounts, the insurance on your accounts may be affected.

Not all financial institutions are covered by FDIC insurance. To find out if a particular financial institution is covered, click here.

Note: Banks often have branches in several states. If you can't find your financial institution listed in your state, set the "state" pull-down menu on this page to All.

For more information about FDIC insurance, including what it does and does not* cover, the FDIC has prepared an excellent booklet, Your Insured Deposit. To view it, click here.

A PDF version of the FDIC booklet is also available by clicking the link in the lower left corner of their Web page. (For more information about PDF documents, click here.)

If you prefer, the FDIC has also prepared an excellent video, Overview on Deposit Insurance Coverage. (Note: Adobe Flash Player is required to view this presentation. The latest version of Adobe Flash Player can be downloaded at www.macromedia.com/go/getflashplayer. Installation questions or troubleshooting help can be found at the same link. For optimal viewing, a high speed internet connection is recommended.)

The FDIC Web site also includes EDIE (the Electronic Deposit Insurance Estimator). As the name indicates, EDIE estimates your FDIC insurance coverage based on your answers to a series of questions about your accounts. For more information about EDIE, click here.

Finally, before investing in a CD, you can check a financial institution's up-to-date financial strength (safety) ratings at TheStreet.com. (Type in the first name of the financial institution and make your selection from the results shown.) If you wish, you can download their comprehensive report that provides details about each financial institution's rating.

- - - - - - - - -

*FDIC insurance does not cover insurance policies, annuities, stocks, bonds, mutual funds, and similar types of investments purchased through a financial institution, regardless of whether you own them directly, through a retirement plan, or through a trust. FDIC insurance also does not cover the contents of safe deposit boxes; ask your insurance agent if your homeowners or renters insurance policy covers your safe deposit box for loss due to theft or damage.