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A wake-up call for depositors

Updated: May 3, 2013 12:14PM

Are your bank deposits insured? If your account is under the $100,000 Federal Deposit Insurance Corp. insurance limit, Friday's failure of IndyMac Bank -- the second-largest American bank failure in history -- shouldn't make you lose any sleep.

But if your deposits are above the $100,000-per-person insured limit, this should be a wake-up call.

America has $6.9 trillion in deposit institutions. But only $4.2 trillion of that is insured, according to the FDIC, which has taken over IndyMac. That leaves a staggering gap of more than $2.6 trillion in uninsured bank accounts.

Nearly $1 billion of IndyMac's assets -- affecting 10,000 depositors -- were uninsured, the FDIC said.

Some of those depositors may have been lured to jumbo CDs because of above-market rates being offered by the struggling Pasadena, Calif., bank. That calls to mind the old saying: I'm not so concerned about the return on my money as I am about the return of my money!

How FDIC insurance works

??Single accounts: These are owned by one person and titled only in that person's name. All of your single accounts at the same insured bank are added together, and the total is insured up to $100,000. So, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together, and the total is insured up to $100,000.

Note: This does not include retirement deposits, such as IRAs and Keogh accounts. Those have a separate $250,000 insurance limit -- and that limit is based on the total of all retirement accounts for that person added together. (You cannot increase that insurance amount by adding different beneficiaries for the retirement accounts.)

??Joint accounts: These are owned by two people or more. If the owners have equal rights to withdraw money from a joint account, each person's shares of all joint accounts at the same insured bank are added together, and the total is insured up to $100,000. So, if a couple have a joint checking account and a joint savings account at the same insured bank, each co-owner's shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple's joint accounts.

Under FDIC rules, each person's share of each joint account is considered equal unless otherwise stated in the bank's records.

??Revocable living trusts: These are created for estate-planning purposes. The owner of a living trust controls the deposits in it.

Deposit insurance coverage for revocable trust accounts is based on each owner's trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account.

The FDIC insures the interests of the beneficiaries up to $100,000 for each owner, with certain restrictions. Coverage is provided for the interest of each beneficiary named by each owner. Additional coverage is not provided to the owners for naming themselves as owners.

Note: There are complex exceptions to this rule for certain trusts. So if you are planning to keep large amounts on deposit for a trust, you should speak with a bank officer to confirm your deposit insurance.

What should you do now?

1. Make sure your bank accounts are insured deposits!

Banks offer many types of investments. Some look like insured deposits. Make sure that products purchased inside your bank are actually insured deposit accounts. Ask that question directly, and ask your banker to show you the language of your account agreement that confirms the deposit insurance.

2. Check your insurance limits.

If you have amounts above $100,000 in your bank, you might want to move money by wire transfer to another insured deposit institution. That could mean having the interest earned on your jumbo CD sent to you each month, instead of accruing to your account. And don't forget that balances in your checking account will be added to your other deposit accounts.

3. Use alternative safe investments.

You can purchase Treasury bills -- the world's safest and most liquid investments -- directly from the government www.treasury The minimum investment is only $100, but you can purchase much larger amounts, in effect getting the government's IOU for money that is far above the deposit insurance limits.

The process of buying Treasuries online is simple, and transactions are done by direct debit from your bank account. Interest is automatically paid to your bank account. For larger investments, you can stagger maturity dates. Plan to hold those securities to maturity -- typically 13 or 26 weeks -- before getting access to your money by having it deposited to your bank account.

Bottom line: You can sleep well with "money in the bank" -- but only if you follow FDIC insurance rules. If you've been smart enough or lucky enough to accumulate savings above the insured limits, you should evaluate your banking situation and take steps to get maximum protection for your money.

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