Is Cash Insurance Necessary

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You have a number of options for investing your cash, none of which involve stuffing it under the mattress. There’s nothing like a highly publicized bank run to panic customers—and make that mattress look pretty appealing.

During the summer of 2008, consumer interest in the Federal Deposit Insurance Corp. soared when three banks failed within three weeks. According to a report in the Baltimore Sun, the FDIC’s website was swamped with nine million hits a day after IndyMac Bank in Southern California, the most heavily publicized failure, collapsed.

Bank failures are frightening. It’s a riveting media story when hundreds of bank customers stand in line for hours to pull out their cash. Yet the reality is that bank collapses have remained rare, even as the credit crisis gripped the country and led to unfathomable bailouts of some of the biggest financial institutions. Near the tail end of 2008, just 2 percent of the roughly eight-five hundred banks and savings institutions had made it on to the FDIC’s “problem list.”

Ironically, the nation’s credit collapse made it easier to avoid becoming a victim of a banking collapse. Here’s what you need to know to stay safe.

Watch the Bank Insurance Ceiling

The FDIC used to insure the cash in your bank account (or spread out in many accounts within one bank) up to $100,000, but until January 1, 2010, the federal government will raise the cash ceiling to $250,000 per depositor. (The ceiling is already that high for retirement accounts, such as individual retirement accounts.)

Consult EDIE

The FDIC’s site has a wonderful tool—EDIE the Estimator—that will add up all of your accounts and alert you if you’re in danger of exceeding the limits at any FDIC-insured bank. You’ll need a list of your deposit accounts at FDIC-insured banks, the current balances, and the names of all account owners and beneficiaries.

Divide Up the Cash

If you don’t let your bank deposits exceed the limits, you’re safe. One obvious way to do that is to spread your accounts around to different financial institutions and then monitor them to make sure the cash doesn’t creep past the limits. You may have to move cash when banks merge.

Consider Using a Registry

Admittedly, some investors will consider scattering money among different banks a hassle. If you’re in that camp, you may be interested in something called the Certificate of Deposit Account Registry Service.

CDARS allows you to select one bank in its network and then choose a CD of various maturities from that one institution. You can then invest any sum of money in that CD and not worry about exceeding the FDIC limits.

Why? Because the service, which represents more than two thousand banks, divides large investments into deposits below the ceiling and places them at different banks. The customer gets the same rate as that offered by the selected institution, and he or she will have to deal with only one statement.

CDARS was created because small banks were always grumbling that they couldn’t compete with the big boys like Bank of America or Wells Fargo. Even though smaller banks can offer higher rates, many customers mistakenly believe that giant banks are safer (the assumption being that regulators won’t let the Goliaths collapse). The network was considered an attempt to level the playing field.

Before embracing this strategy, compare CD rates outside this network; you might find more competitive rates elsewhere.

Know What’s Covered

The FDIC will protect all sorts of bank investments, including CDs, savings accounts, and checking accounts.

The protection doesn’t extend to the contents of safe deposit boxes. The insurance also doesn’t cover such investments as stocks, annuities, and life insurance. The bank may sell you one hundred shares of Home Depot stock, but it can’t guarantee what happens to it after you buy it.

Make sure that your bank and credit union deposits don’t exceed the FDIC’s insurance limits.

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