Get answers to questions about FDIC insurance regulations.
Many of the listener emails and voicemails I've received lately have been about FDIC insurance. I see this is a popular topic, so I'll answer a few specific questions about FDIC coverage in this episode.
Now, let's get to the great listener questions I received...
Time for Payment of Insurance Claims
Ken writes in,
"Federal law requires the FDIC to make payments to depositors as quickly as possible after a bank fails. Is there a defined time table? How long is the FDIC legally allowed before [making] payment during a wide spread series of bank failures?"
Ken, thanks for the question. The FDIC policy regarding the time for payment of insurance claims is "as soon as possible", with no specific timeframe or payment deadline. But let's consider how payments from the FDIC have been handled in the recent past.
Historically the FDIC has made payment on insured funds within a few days. They typically make arrangements for a bank in good standing to open a new account for each recipient of insured deposits and send their money on the next business day.
In the event that the FDIC cannot send funds to a healthy institution, they issue checks directly to depositors. They indicate that this payable process can take up to three business days. And with certain type of accounts, such as living trusts or those opened by brokers, the FDIC may need more time to finalize the insurance payment. But they say that this process usually wouldn't take more than one to two weeks.
Misconceptions about FDIC Insurance
There is a misconception that the FDIC could take up to 99 years to pay depositors. In their Top 10 Misconceptions list, the FDIC website states that this is completely false. Here's a quote from an FDIC claims manager:
"FDIC staff does whatever it takes -- often working long into the night or the weekend -- reviewing thousands of account balances and determining the insurance coverage for each depositor... and that is essential to maintaining consumer confidence in banks, which keeps local economies running smoothly, especially in small communities."
Here's a link to this FDIC consumer information.
Beneficiaries of FDIC Insured Accounts
A listener named Nancy writes in,
"I went to add a beneficiary to my CD account to increase the FDIC insurance to $200,000. I was told .... [ husband, wife, mother, father, child, sister, [or] brother are the only FDIC recognized beneficiaries. Is that true?"
Thanks for the question Nancy. The answer depends on the ownership type of your account. If you intend to own it as a joint account with the beneficiary, they become a co-owner and are not required to be related to you.
However, if you intend to own the CD as a revocable trust, also called a "payable on death" or POD account, the beneficiary requirement is different. All beneficiaries of these payable on death accounts must be related to the account owner as either a spouse, child, grandchild, parent, or sibling. Revocable trust accounts are insured up to $100,000 per owner for each beneficiary.
FDIC Recognized Account Ownership Types
Deborah wrote in with another question related to account ownership. She asks,
"How about a savings account [that's] in trust for my daughter, would that also be insured for $100,000 ... [separate from the insurance for] my personal account for $100,000?"
I appreciate the question Deborah. Yes, if the account for your daughter is set up as a revocable or irrevocable trust account, it has separate insurance coverage from a single or joint account.
Any deposits maintained in different categories of legal ownership are separately insured even if held at the same bank. There are eight ownership categories recognized by the FDIC. The first seven qualify for the $100,000 insurance amount:
- Single Accounts
- Joint Accounts
- Revocable Trust Accounts
- Irrevokable Trust Accounts
- Employee Benefit Plan Accounts
- Government Accounts
- Corporation/Partnership/Unincorporated Association Accounts
- Self-Directed Retirement Accounts (these have an insured total of $250,000) FDIC
Insurance for Corporate Accounts
I received a voicemail from a listener named Rick, who was adversely affected by the failure of IndyMac Bank last month on July 11th. Here's a portion of his message:
[Audio clip] "Yes, we had two money market accounts with IndyMac Bank before it failed. They were under two different taxpayer identification numbers. The first was a corporation sub-chapter S corporation. The second was a LLC company. The way we see it, it's two different corporations, two different companies. So therefore it should not be pooled together. Just wondering if you could state some code that we could look at and possibly try to understand that."
Both of Rick's account names referenced the same company, and therefore may have been regarded as belonging to one FDIC ownership category. The corporation account type that I mentioned includes both Subchapter S and Limited Liability Companies. So even though they're separate entities under the eyes of the law, the FDIC doesn't insure them separately unless they can prove engagement in "independent activity."
This means that if a corporation, partnership or unincorporated association is not engaged in independent activity, for insurance purposes the FDIC will only cover a total of $100,000 in deposits.
Rick, thanks for your message, and I'm sorry for your financial loss. I'll put a link in the show notes to the FDIC Corporation regulation.
Click here for an update to FDIC Deposit Insurance regulations.
I'm glad you're listening, and look forward to reading more of your comments and questions. Send email to firstname.lastname@example.org -- you might just make it on the show!
Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.
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