What you need to know about FDIC insurance limits

With the recent implosions of both Silicon Valley Bank (SVB) and Signature Bank, as well as the shaky footing felt by many other banks here in the U.S. and globally, investors are understandably growing more concerned by the day about the solvency of the bank industry.

As part of all this news, Federal Deposit Insurance Corporation (FDIC) insurance has featured prominently in headlines as investors have stood in line at the aforementioned banks to get their deposits out. With that in mind, we wanted to help investors understand what FDIC insurance is, as well as discuss ways they might be able to increase the amount of assets that are insured for their household.

First, let’s go over the general rules regarding FDIC coverage.

The limit for FDIC coverage is $250,000 per depositor, per bank, in each account ownership category. Many have taken this to mean that they shouldn’t have more than $250,000 in deposits in any one bank, but it’s important to remember that an investor or household can get more than $250,000 of coverage at one bank if they spread assets between different account owners and/or registrations.

Let’s look at how this might work with a hypothetical scenario:

Husband’s checking account: $150,000
Wife’s checking account: $100,000
Husband/wife joint account #1: $300,000
Husband/son joint account #2: $100,000
Total Deposits: $650,000

In the case above, both checking accounts would be fully insured for both the husband and wife. Below, we can see how coverage for the joint accounts would be calculated.

	Husband	Wife	Son
Joint Acct #1	$        150,000	$        150,000
Joint Acct #2	$          50,000		$        50,000
Total coverage	$        200,000	$        150,000	$        50,000

 

Notice that the joint accounts are split evenly by the owners, which means no one individual has more than $250,000 in that particular registration type. Thus, the full $650,000 would be insured by FDIC for this household.

How to get coverage for more than $250,000

Aside from spreading out assets as described above, there is, another easy way individuals or households can increase their FDIC coverage to up to $1.25 million. This can be done by making accounts “payable on death,” which means they would directly pass on to a named beneficiary at the time of the account holder’s death. Since there is a beneficiary interest, the FDIC currently allows for coverage up to $1,250,000 at a single financial institution, so up to five different beneficiaries could be designated that would be payable on death. (It’s important to note, however, that none of them can be covered for more than $250,000.)

Here’s an example of how this could be accomplished at one financial institution:

• $250,000 certificate of deposit, payable on death to John Doe
• $250,000 checking account, payable on death to Jane Doe
• $250,000 savings account, payable on death to Jeff Doe
• $250,000 money market account, payable on death to Jennifer Doe
• $250,000 savings account, payable on death to James Doe

This could also be done through one revocable trust account with five unique beneficiaries. The FDIC “Your Insured Deposits” page provides several details on this option. Also, while specific state laws may make this more difficult, and payable on death instructions cannot be overridden with a will, a revocable trust may allow one account owner to significantly increase their FDIC insurance as well as implement some smart estate planning strategies. As always, investors should consult with their financial professional and/or estate planning attorney before making changes to their estate plans.

I would be remiss if I did not remind readers that we believe the unique forces that led to SVB and Signature Bank being put into receivership do not present a systemic risk to the U.S. banking system (for more views on that, read the recent article from our Financials Sector Lead John Jordan, A resilient U.S. banking system weathers the SVB crisis).

With that said, I do understand how nerve-wracking the last week has been for investors in general, and specifically for those who may have significant deposits at their banks. FDIC was created for situations like these. By understanding how the system works – as well as considering other strategies to further insure one’s assets – my hope is that investors can feel a bit more confident about the money they’ve entrusted to their banks.