The downside of the new $250,000 deposit insurance limit

It may be comforting to know that the economic recovery plan recently passed by Congress and signed by the president more than doubles federal deposit insurance at banks and many credit unions to $250,000 per account type.

But unless it's extended by law, the expanded coverage will expire at the end of 2009. At that time insurance limits will revert to $100,000, with the exception of self-directed retirement accounts, such as traditional IRAs, which will remain at $250,000.

That's especially significant if you’re planning to put more than $100,000 into a long-term certificate of deposit. Unless you’re careful, you could unintentionally leave part of your deposit uninsured for some of the time.

For example, if you deposit $180,000 in an 18-month CD in January, as of the beginning of 2010 only $100,000 will be covered by insurance, leaving $80,000 plus any accumulated interest at risk should the institution fail. Because the rules for most CDs don’t allow depositors to withdraw funds before the maturity date, you wouldn’t be able to redistribute the amount into separate insured accounts for six months. We don't think depositors should take that risk, given the increasing number of bank and credit union failures.

Even if you place the money into standard savings or other liquid accounts, you’d need to divide it before Jan 1, 2010 in order to maintain full coverage. If you forget or delay, that money also will be at risk.

It might be safer and more convenient to continue handling your deposits as though $100,000 were still the limit and take advantage of the various ways depositors traditionally have been able to obtain federal insurance for amounts higher than that. For example, you can spread the money among more than one institution or into different account types, or deposit it into multiple-coverage accounts, such joint accounts or revocable trusts.

For more information on how to make sure your deposits are covered by federal insurance, check the Federal Deposit Insurance Corporation and National Credit Union Administration Web sites. —Anthony Giorgianni

Comments

[Insurance]

Interesting information. It's good to see how other people feel about insurance.