What’s Insured And What Isn’t

It’s nice to know that your savings are protected in some way. Most people know about FDIC insurance for savings banks, but there are other insurance forms that are important as well.

FDIC:  The FDIC covers account holders at an insured bank (all state and nationally chartered banks must have FDIC insurance) for $250,000 in individual accounts at one bank. If you have a savings account for 200K, a 50K CD and 50K in your checking, then only 250K of that 300K total is covered. Currently, joint accounts are covered separately, and each co-owner is covered for 250K, so you can have a joint account with your wife that is insured up to $500K, a 250K individual, your wife can have a 250K account and the whole $1 million is covered. Odd, but true. Deposits in separate branches of an insured bank are not separately insured. Things change, including FDIC insurace. Find out what the current rules are and partition your savings accounts accordingly.

Certain kinds of accounts in the same bank can be covered. These include: Some retirement savings accounts, trust accounts–both revocable and irrevocable, employee benefit plan accounts, and corporate, partnership, and unincorporated association accounts. All of these categories have specific requirements that you should discuss with your banker. And of course any stock or bond elements of retirement accounts are not covered by FDIC, only the cash elements. 

If you have more cash savings than that you might want to split it up between several banks. A bit of a pain, but a lot less pain than losing the uninsured portion in a bank failure.  In the event your bank fails and you have an uninsured excess the FDIC gives you a check for your insured amount and a Receiver’s Certificate for the balance in the account. When the assets of the bank are liquidated you will receive a prorated portion of the liquidation amount. Don’t expect much, the FDIC gets first dibs. 

It’s worthwhile to note that they FDIC covers ONLY bank failure. Fraud, hacking, and other forms of theft or loss are not covered. Banks themselves cover your account against fraud. Many banks purchase insurance against fraud or establish a reserve to cover losses.  If you suffer a fraudulent loss you should report it to your bank as quickly as possible so it can be investigated. Banks are required to give customers provisional credit for losses in ten days, but most give full credit almost immediately. 

For more information on FDIC coverage go to www.fdic.gov or google other sources to get explanations not couched in bureaucrat-ese.

Insurance Company Failure

Annuities are insurance, and the companies that issue them are subject to failure. That’s rare, but it happens. Usually when it does another insurance company will take over the insolvent company and the annuity won’t change, but if not, the state commissioner of insurance acts as a trustee. If an insurance company is placed under state control there may be temporary restrictions placed on the kind of transactions you can execute regarding your policy–for example you may not be permitted to withdraw completely from the annuity while it is held insolvent.

States also require annuities to be covered by an insurance pool. The amount of coverage changes state-to-state and coverage you enjoyed living in one state may not continue when you move to another. Again, these rules vary, so if you have an annuity and you’re contemplating a move, make sure you know what your coverage result will be. There’s a very useful document on Annuity protection here:   http://www.nafa.com/wp/wp-content/uploads/2012/07/State-Guaranty-Fund-Directory.pdf   It’s supposed to be just for agents, but we won’t tell if you don’t.

It’s always wise to spread your annuities among multiple companies, and the amount of coverage available to you in your state is probably the best way to decide how many to use.

Securities and Cash held by Brokers

The cash and securities held at a brokerage firm are protected by Securities Investor Protection Corporation (SIPC). Some investments like commodity futures contracts and any unregistered securities or alternative investments are likely not covered.  Customers of a brokerage that goes broke get back all stocks and bonds that registered in their name. Claims for other assets such as cash are generally covered up to $500,000 per customer, with a maximum of $100,000 for cash claims. In most cases after a brokerage failure your  shares are quickly transferred to another broker and you have normal access. Your cash claims may take longer. If the broker is liquidated and kept crappy records the court appointed trustee has to sort everything out, and that could take months. If the principals of the firm engaged in fraud, the recovery could take even longer. Still, SIPC coverage gives you some additional assurance that your assets are safe. But ultimately the safety of your investments depends on your choice of broker. I don’t screw around with anyone b-team, no matter how good their service might be. You don’t really get to look under the hood of these companies. Choose your custodian wisely.

Even if your broker is one of the megalith firms you should maintain your own records of the assets you own. Online access is not enough, you need backup data, either screen-grabbed and stored on your own equipment and backup or paper in your safe deposit box. You need to be prepared to show trade confirmations for all assets. With a failed brokerage, especially in the event of fraud, there may be trades that were executed without your consent.

For more information on the SIPC, go to www.sipc.org. or google SIPC.



The Retirement Trap Copyright © by Bill Babcock and Babcock, William. All Rights Reserved.

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