Worried your bank might fail?

Since paraphrasing might leach this important article of its helpfulness, I've decided to post it here in its entirety.  Economy woes have left many of us worrying that our banks might fail--The Mercury News published an article recently by Pete Carey that lays out in simple terms the ways our money is safe-guarded and how it isn't. 

Worried your bank might fail? Here's how you're protected--and how you're not

Pete Carey

The Mercury News

We've all got the jitters these days. Will the bank fail? Is our money safe? What about our investment accounts, and the IRAs we have at our bank or credit union?

The bad news is that not all investments are protected by federal insurance, and there are limits on what is protected. The good news is that quite a lot is covered, and there are strategies for gaining more protection. 

Experts say there's no need to pull your money out of the bank. But here is how your money is insured at various financial institutions, and how you can increase your protection.

BANKS

In the event of a bank failure, the Federal Deposit Insurance Corporation insures deposits, including money market accounts, up to $100,000.  The vast majority of banks, including all state-chartered banks in CA and many foreign-owned banks, are FDIC insured. To make sure your bank is an FDIC member, go to "Bank Find" on the FDIC web site at www.fdic.gov/deposit/index and type in your bank's name and state.

The FDIC also insures certain retirement accounts up to $250,000. These include all IRAs and self-directed defined-contribution accounts, such as 401ks and Keogh plans for the self-employed. This is in addition to the $100,000 per-account protection for bank accounts.

Here are a couple of ways to increase your coverage:

• Co-owners of an account are each insured up to $100,000, so they can have up to $200,000 in a joint account with the full amount protected by the FDIC. Or, they can open three accounts- one joint and two individual accounts--for $400,000 coverage. 
  
• For a living or revocable trust with multiple owners, the FDIC provides up to $100,000 of insurance per qualified beneficiary (parents, siblings, spouse, children and grandchildren). A trust with six owners is insured for $600,000.

Thus, a couple with no children could be insured for up to $1.1 million by having a joint account, two individual accounts, two retirement accounts and two revocable trust accounts naming one another as beneficiaries. 

• Another strategy is to spread your money to many different banks. You and your spouse could have $600,000 in joint accounts at three banks, for example, all of it protected by the FDIC. There is no maximum number of banks where accounts can be held.
  

"Some banks have utilized creative mechanisms for insuring that their depositors can gain even more deposit insurance than that offered by the FDIC," notes William Heraf, commissioner of the California Department of Financial Institutions. He advised checking with your bank to find out if it has done that.

If one of your banks merges with another, the FDIC allows a six-month grace period in which coverage continues as though the money were still at separate banks. 

If your bank fails, the FDIC will find a healthy bank to step in and take over its operations. That usually happens on a Friday, and the bank reopen on Monday with full access to your accounts. Over the weekend, you would still have access by using checks, debit cards and ATM cards.

To learn more about how to structure accounts for maximum coverage, go to www.fdic.gov and click on the "deposit insurance" tab. 

CREDIT UNIONS

Accounts in credit unions are insured by National Credit Union Administration, which operates in essentially the same way as the FDIC.

BROKERAGES

Cash and securities such as stocks and bonds held in a brokerage account are protected by the Securities Investor Protection Corp, or SIPC. That includes 401k plans and investment accounts at banks, as long as they are registered with the Securities and Exchange Commission. 

SIPC, created by Congress in 1970, insures accounts up to $500,000, with a maximum of $100,000 for cash. Of course, you aren't insured against losses incurred by your investments because the stock market is tanking.

You can find out if your brokerage is an SIPC member at www.sipc.org.

Brokerages are required by the SIPC to segregate cash and securities owed to customers, so that in the event of a failure they are safe and can be returned to the customer. If for any reason the failed brokerage didn't segregate the securities, SIPC liquidates the brokerage to pay the customer.

"In this instance, customers are assured they'll get their assets back," said SIPC President Stephan Harbeck. "If there's anything missing, SIPC can use its funds to replace any missing securities," he added. 

In the case of Lehman Brothers, the investment bank that filed for bankruptcy last week, the account segregation "is in good shape" and no customer assets are missing "as far as we know." For technical reasons, however, SIPC may file liquidation proceedings to help facilitate an account transfer to Barclays Bank. Individual accounts are now at a Lehman subsidiary. 

Make sure to check out other great resources at The Mercury News website.