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Know Your Coverage Limits |
With all the bad financial news in the headlines these days, some investors are understandably nervous about the security of assets held in banks and by brokerage firms. Fortunately, there are some safety nets in place.
Here is a rundown of the basic protection available.
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New Federal Guaranty Program
For Mutual Funds
In an unprecedented move, the federal government announced on Friday, September 19, that it would temporarily insure certain money market mutual fund holdings. The step was taken to alleviate the worries of investors after shareholders withdrew a record amount of money from the funds.
For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.
President Bush authorized the use of the Treasury's Exchange Stabilization Fund to guarantee up to $50 billion in eligible money market funds.
In a press release, the Treasury Department said the insurance was made available because "maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system." |
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Safeguards for Brokerage Accounts
If your brokerage firm goes out of business and is a member of the Securities Investor Protection Corporation (SIPC), your cash and securities held by the brokerage firm may be protected up to $500,000, including a $100,000 limit for cash.
Some brokerage firms obtain private insurance policies to provide protection above SIPC limits.
When a member becomes insolvent, SIPC will ask a court to appoint a trustee to supervise the firm's liquidation and to process investors' claims.
SIPC covers most types of securities, such as stocks, bonds, and mutual funds. But SIPC does not protect you against:
1. Losses caused by a decline in the market value of your securities.
2. Investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the Securities and Exchange Commission (SEC).
3. Commodities futures contracts.
Coverage problems. According to the SEC, one common, difficult issue handled by SIPC trustees involves unauthorized transactions. These are trades a broker makes without the authorization or permission of the account owner.
To qualify for SIPC coverage on an unauthorized trade, the investor must prove it. "That's why it's so important that you send a complaint in writing to your broker as soon as you become aware of an unauthorized transaction," the SEC states.
A written document may be the only way to prove that you complained to the firm about unauthorized transactions. If you do nothing -- or if your broker persuades you to "ratify" the trade or agree to it after the fact -- it will be difficult to prove you did not authorize the trade. Always read your account statements carefully and complain promptly in writing in the unlikely event you detect unauthorized transactions.
Another coverage problem occurs when investors place cash or securities in the hands of a non-SIPC member. This sometimes happens when a brokerage firm doesn't actually execute buy and sell orders. Instead, the broker uses another firm to process trades. Make sure that your brokerage house and its clearing firm are members of SIPC. Firms are required by law to tell you if they're not. You can also search SIPC's Membership Database or contact its Membership Department by calling (202) 371-8300 to find out whether a firm is a member.
Finally, the SEC advises, "you can also protect yourself by making payments only to firms that are members of SIPC." Never make a check out to a sales representative or send checks to a different address different from the brokerage firm or a designated address listed in the prospectus. |
Banks and Credit Unions: What Does the Federal Government Insure?
The Federal Deposit Insurance Corporation insures deposits at insured banks, including checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to a certain limit.
The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities -- even if you purchase these products from an insured bank. Share accounts at credit unions are federally insured at similar levels by another agency, the National Credit Union Administration.
Basic Insurance Amount
The basic insurance amount is $100,000 per depositor per insured financial institution. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank or credit union.
Important: If you and your family have $100,000 or less in all of your deposit accounts at the same insured bank or credit union, your deposits are fully insured.
Common Misconception
Placing funds in different types of deposit accounts (such as checking, savings and CDs) does not provide separate insurance coverage. All types of deposit accounts that you have in the same ownership category are combined and insured up to the insurance limit for that ownership category.
For example, let's say you have three accounts in your name alone at a bank -- a checking account, a savings account, and a CD. The funds in all three will be added together and insured for up to $100,000, rather than $300,000.
FDIC Coverage Above $100,000
The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership. For example:
 Certain Retirement Accounts. These are deposit accounts owned by one person and titled in the name of that person's retirement plan. These types of plans are:
- Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs;
- Section 457 deferred compensation plan accounts (self-directed and not);
- Self-directed defined contribution plan accounts; and
- Self-directed Keogh plan (or H.R. 10 plan) accounts.
All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. For example, if an individual has an IRA and a self-directed Keogh account at the same bank, the deposits in both accounts would be added together and insured up to $250,000.
Naming beneficiaries on a retirement account does not increase deposit insurance coverage.
Joint Accounts. These are deposit accounts owned by two or more people. If both 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.
If a couple has 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.
Example: You and your spouse have a $220,000 CD at an insured bank. Under FDIC rules, each person's share of a joint account is considered equal unless otherwise stated in the bank's records. So you each own $110,000 in the joint account category, putting a total of $20,000 ($10,000 for each) over the insurance limit.
Living trusts. The FDIC will provide insurance coverage of up to $100,000 for each qualified beneficiary entitled to the trust's assets upon the death of the account owner. So a living trust owned by one person with three children as beneficiaries is eligible for $300,000 in FDIC coverage.
(Click here for more information from the FDIC about coverage on insured deposits.)
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Want to check out an insurance company before you buy a policy? The National Association of Insurance Commissioners provides information about closed insurance complaints, licensing and key financial data. Click here to access the service. |
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