Knowing and understanding the best ways to insure excess bank deposits will definitely help you become more confident that whatever happens to the bank of your choice, your funds are good.
Have you ever thought of what’s going to happen to your money if your bank went sinking?
It’s probably a nightmare for some.
But guess what? Bank failures actually happened already in the past.
According to the Federal Deposit Insurance Corporation (FDIC), because of the financial crisis that happened back in 2008, 465 banks shut down in a span of four years.
Because of what happened, the banking industry had an increase in the insured account limit by the FDIC.
But the thing is, what if you have more than the limit? What are the best ways to insure excess bank deposits?
Well, that’s precisely is what we are here for. We are going to share with you different ways to keep your funds safe from the risks of uninsured losses should the unlikely happened to your bank (which is feasible especially these days when the pandemic is hurting the economy really bad).
But before we share with you some of the best ways to insure excess bank deposits, we find it necessary that you must understand first the following:
- What does “excess bank deposit” mean?
- What are FDIC limits?
- How to maximize FDIC coverage through CDs and CDARS?
- What causes bank failures?
- What happens if an FDIC-insured bank fails?
- How to insure excess bank deposits beyond FDIC limits?
- How to not lose cash due to bank failures?
WHAT DOES EXCESS BANK DEPOSIT MEAN?
Before we even talk about the best ways to insure excess bank deposits, let us first know and understand what “excess bank deposit” means.
Actually, the meaning is pretty obvious. This basically pertains to the money or funds you have in the bank in excess of the amount that FDIC insurance covers.
For example, you have $500,000 in the bank. However, FDIC can only insure up to $250,000 worth of deposits per account. This means that the remaining $250,000 will not be covered by the FDIC.
So, if the bank fails, it means you will lose the other half of your money in the bank. That is why it is important to find ways to insure excess bank deposits so in case a bank failure happens, your money won’t disappear just like that.
If we may just say, this topic is timely given the current situation in the country, and in the world. The current pandemic brought by Covid-19 greatly affects the economy. In fact, so much that we won’t be surprised if bank failures happen in the next few months. Hopefully not, but that is very likely to happen, and we must be prepared for it.
Having said that, let’s proceed to know what the FDIC limits are —
WHAT ARE FDIC LIMITS?
First and foremost, who is FDIC?
The Federal Deposit Insurance Corporation or more commonly known as FDIC is an independent agency of the federal government that was “created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s“.
In its website, it says that FDIC “preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.”
Since the inception of FDIC insurance, “no depositor has lost a single cent of insured funds as a result of a failure.”
Oh, if you want to know more about FDIC, here’s a quick how it works video from FDIC Channel on YouTube:
As mentioned, all FDIC-insured banks have insurance coverage of up to $250,000 per depositor, per bank. This basically means that up to $250,000 of a depositor’s money, spread across deposit accounts, is covered in the said insurance per bank.
When we say deposit accounts, this includes:
- Checking accounts
- Savings accounts
- Certificate of Deposits (CDs)
- Money market accounts
In the case of a joint account that comes with equal ownership, each of you is insured up to the same amount, which is $250,000. That means getting a total of $500,000 worth of FDIC insurance.
Using the FDIC’s Electronic Deposit Insurance Estimator (EDIE), depositors can calculate coverage for a particular group of deposits.
Meanwhile, to find an FDIC-insured bank, you can simply use the FDIC’s search tool to find out what you are looking for.
Unlike other forms of insurance, FDIC insurance does not cost anything. More so, there are no forms that need to be filled out.
HOW TO MAXIMIZE FDIC COVERAGE THROUGH CDs AND CDARS?
There are handful companies out there that are willing to put your cash in various certificates of deposit, money market, as well as savings accounts under your name for a certain amount to help ensure that you get enough coverage from the FDIC. Doing so will help protect your money up to a single centavo.
While there are a lot of options to choose from, one of the most popular and well-known services to spread your funds across banks is the Certificate of Deposit Account Registry Service or CDARS.
CDARS works with a network of banks to keep your deposits insured in accounts under the $250,000 FDIC insurance limit.
If you have millions in cash assets, this may be very worth it.
Now, if keeping your money locked in CDs does not sit right with you, you may consider other options like CDC deposits. This one’s just the same as it puts funds in the money market accounts instead of CDs. More so, CDC Deposits has a positive social mission that high-net-worth customers can feel safe and secured about supporting.
Either way, whether you choose CDs or CDARS or both, you get a single deposit account with just one 1099 form, and also it also comes with one point of contract.
WHAT CAUSES BANK FAILURES?
Before we talk about what happens to an FDIC-insured bank if it fails, we thought it is also important that you have an idea of why bank failures actually happen.
Generally speaking, banks fail when they are no longer able to meet their obligations as an institution. Banks may either lose too much on investments or in some cases, are unable to provide cash when customers demand it.
Bank failures happen when banks are not able to keep your money in vaults. If you are not aware, the moment you deposit cash in the bank, the bank automatically invests that money. One example of investment is through making loans to other bank customers. By loaning money, the bank earns interest, at the same time, they get to pay you interest on your deposits.
But apart from that, banks also invest in more complicated ways. Now, if the bank takes large losses in any one aspect, it may eventually fail.
Let’s just say that banks need to be very articulate and careful when investing to ensure that it won’t fail. However, sometimes, there are just things beyond their control, and when that happens, again, the unlikely may happen.
WHAT HAPPENS IF AN FDIC-INSURED BANK FAILS?
As we have said earlier, banks fail, too. Yes, it’s inevitable, and in fact, it may happen anytime.
But what actually happens if an FDIC-insured bank fails?
If an FDIC-insured bank goes out of business, the failed bank’s deposits will be transferred to another FDIC-insured bank. However, if that is not possible, what happens is, depositors will get a check from the FDIC up to the amount of coverage for their deposits, which is $250,000 per person.
This scenario usually raises the question — what happens if you have more than $250,000 in the bank? Based on our example earlier, only $250,000 of the total deposited amount is covered. The rest is unfortunately not covered by FDIC anymore, which may mean you will lose the excess amount. That is why ideally, as much as possible, financial experts suggest keeping your deposited amount within the FDIC-insured limit so as to avoid losing your hard-earned money due to bank failure.
Having said that, let’s process to how you can actually insure excess bank deposits —
HOW TO INSURE EXCESS BANK DEPOSITS BEYOND FDIC LIMITS?
So, now that you already know what FDIC is all about and how much the FDIC limit is, let’s proceed to the best ways to insure excess bank deposits. This is ideal and most applicable to those with over $250,000 in their bank accounts (whether it be single or multiple accounts).
1. Split Your Money in Multiple Banks
As mentioned earlier, FDIC coverage is on a per depositor, per bank basis. So, that means, you can actually get two or more times the FDIC coverage by simply opening accounts in different banks.
For instance, you have $500,000 in bank deposits. You can open another bank account for the other half, which is $250,000, or you can also opt to split it into two new accounts, spreading the amount on each bank equally.
While this may be a little consuming both in starting off and in maintaining the accounts, but if you will look into the benefits you get in the long run, it’s going to be worth it.
2. Try Out Wintrust Financial
Historically available in both Chicago and Milwaukee markets, Wintrust Financial offers another option to spread out deposits beyond the FDIC coverage with a new nationwide focus. By the way, the company is looking out to taking its product on a national level anytime.
Wintrust has a network of 15 chartered banks and they offer insurance of up to $3.75 million for one depositor.
Wintrust comes with a business model that works really well for excess deposit coverage. With this 28 billion-asset company, you will surely not go wrong.
3. Put Your Money in Massachusetts
For some depositors, they opt for a more creative solution to ensure the safety of their money. One example is in Massachusetts, it offers insurance for bank deposits over the FDIC limit. Technically, there is no limit to the state insurance for deposit account via the Depositors Insurance Fund (DIF).
Based on its 2017 Annual Report, the DIF covers a total of 52 banks and insures $14.1 billion in excess deposits beyond the FDIC limit.
Furthermore, while a lot of banks are available only for locals, a certain number of Massachusetts banks would likely take your deposit regardless of the US state.
4. Put Your Money in Brokerage Accounts
If you have funds of over $250,000, one best way to keep those funds safe and secure is by having a brokerage account with trusted institutions like Fidelity or Charles Schwab.
Usually, brokerages offer CDs from various banks across the country as part of their suite of available products.
Apart from the convenience of one-stop shopping, usually, you will find yields that are more than the national averages.
Make sure though that your money is divided among non-related banks.
5. Use Credit Unions
Another way to insure excess bank deposits is by putting the excess funds in credit unions.
Just so you know, non-bank accounts get coverage, too.
In fact, credit unions offer similar coverage to that of FDIC through the National Credit Union Administration (NCUA). NCUA is credit unions’ own regulator.
More so, the Securities Investor Protection Corporation (SIPC) fills that role for investment accounts. However, there is a slight difference in terms of limits and rules.
Since investments can lose value, SIPC coverage clearly states that you are not covered for losses due to bad investment decisions.
The coverage though is up to $250,000 in cash per account and $500,000 per customer for all accounts in one financial institution.
6. Get Into Digital Banking
Thanks to technological advancement and the internet, digital banking came to life. It made two things pretty easy.
One, digital banks offer the best rates on both CDs and money market accounts with tools that are very much helpful, and two, opening an account online is made very easy.
While technology is not perfect, what’s good about it is that it continues to get better especially for banks that are becoming known on a national level.
7. Spreading as a Service
Earlier we talked about CDARS. So, by now you probably know already what CDARS is all about.
Anyway, if you are someone who likes the idea of spreading your money on different CDs and money markets, but does not have the time and energy to do the work yourself, then lucky you as there are a few networks that can do that on your behalf.
One of the most well-known is CDARS. You may check with your bank if they do offer this service.
Basically, this is how it works.
Funds that are over $250,000 are deposited in CDs in other banks within the network. Then, the system ensures the money is divided into non-related banks. To be sure, you may check it as well.
Now, if you feel uncertain with tying your money up in CDS, the Promontory Financial Network, the operators or CDARS, added Insured Cash Sweep to its product suite a few years ago, which basically covers transactions as well as savings accounts.
In the same way, CDC deposits also offer a program for money market accounts through the company’s MMAX account.
Let’s face it, it’s pretty much convenient for us to let experts do the work for us. With both programs though, you will get one statement, and 1099 for tax records.
HOW NOT TO LOSE CASH DUE TO BANK FAILURES?
Let’s admit it, it feels really bad to lose money especially if you lose it because of a bank failure. Losing money and not being the one at fault for the loss is even more painful.
That is why it is important to plan ahead, think ahead.
As a depositor, you have to first and foremost, be aware that everything can happen – including bank failures. Do not be too confident with having all your money in just one bank. Yes, even the biggest and largest banks in the world can eventually falter – no one really knows. So, it’s better to be ready for that kind of event.
To avoid losing money because of bank failures, make sure to consider the best ways to insure excess bank deposits, which we have provided above. These actions will surely help keep you out of trouble should the unlikely happen one day.
Again, do not be overly confident. Otherwise, you may end up a mess for losing your hard-earned money for nothing.
FINAL THOUGHTS ON BEST WAYS TO INSURE EXCESS BANK DEPOSITS
Regardless if you are rich or not (but all the more if you have lots of money in the bank), it is important that you are aware of the ways to insure excess bank deposits to avoid getting into trouble someday.
Make sure to know the maximum limit of insured funds, and when you have already exceeded, then, consider doing any of the options we have provided earlier.
How do you find them anyway? Do you see any of those applicable to you?