Although I believe that FDIC insurance will ultimately prove worthless, that moment is probably some years away.

In the meantime, it makes no sense whatsoever to deposit more than the FDIC-insured limit in any one bank. That is just asking for trouble, especially given the fact that things are only going to get worse as far as banks are concerned.

For those who profess to be relaxed about such things, let the following post from the Bank Deals blog, "$400,000 of Deposits at a Failed Bank, First-Hand Experience at ANB Financial," be a warning.

One of this blog's readers was a depositor at the failed bank ANB Financial, and he has emailed me his experience to share. I reported on this bank failure Friday after the FDIC sent out its press release. He and his wife had opened a $400,000 CD last summer at this bank. He thought he was covered since he was careful to open the CD in the proper ownership category. However, when he read about the bank failure on Sunday, it did ruin his weekened. What if there was some esoteric mistake in the bank's documentation that put the money at risk?

The good news is that his diligence when he opened the CD paid off. The $400,000 was insured, and they were able to receive the funds on Monday after several nerve-racking hours at the bank. Here is how he described this time:

We spent 3 hours there inside the bank calling various phone numbers and being mostly told, "the information you have received is erroneous." No one took any responsibility for getting the money to us. Finally, one of the FDIC team members inside the bank decided to personally intervene on our behalf. Within about 45 minutes, we had correctly navigated the maze and wire transfer form had been fax'd to the correct location and authority to effect the transfer.

The bad news is that the interest earned was not covered. The CD had earned almost $15,000 in interest, and this put the total amount above $400,000. The FDIC claims agent told them that they'll receive a "receiver's certificate" within 30 days and that they may someday receive something back.

Why have over $100,000 in one bank? Sometimes this happens when people just forget, and the money keeps growing until it exceeds $100,000. However, in this case the reader was taking advantage of a 5.82% APY CD special. I had reported on this special last September.

If you're going to take advantage of similar deals with deposits over $100,000, you should be interested in what he has learned. I describe these lessons below along with some other potential issues that I've learned over the last few years from other readers.

Be Very Careful When You Go Above $100,000

It's not common knowledge, but you can have over $100,000 FDIC insurance for a non-retirement account at one bank. The FDIC defines many different ownership categories. An account that falls into one of these ownership categories can have more than $100,000 of coverage if the account meets the applicable requirements. You should be very careful to ensure these requirements are met, and you shouldn't assume that your bank is taking care of this.

The ownership category that the reader and his wife used was a revocable trust account. This FDIC page provides the formal definition of a revocable trust account. A subset of this account is a payable-on-death (POD) account. The owner of a POD account is insured up to $100,000 for each beneficiary if 3 specific requirements are met. This FDIC page describes these requirements.

Account Title Requirement

The first of these 3 requirements can be problematic. The requirement states that the account title must include a commonly accepted term such as "payable-on-death," "in trust for," "as trustee for" or similar language to indicate the existence of a trust relationship. The term may be abbreviated (for example "POD," "ITF" or "ATF").

The problem is that banks often do not include the POD or similar term in the account title. This almost happened to the reader. Here's what the reader reported:

Because of your FDIC insurance warnings and advice we were VERY hardnosed about correctly titling the accounts. In fact, the bank almost refused to correctly title the two POD's but we told them we would "walk" if they didn't. They finally relented and titled them exactly the way they were supposed to be titled.

This seems to be a common problem among banks. Last year another reader reported having problems with Countrywide Bank. He had applied for Countrywide's Savingslink account, and in the application, he listed two beneficiaries. The problem was that these beneficiaries were not officially added to the account titled as POD's. So if you are depending on POD's to extend your FDIC coverage over $100,000, make sure you verify the proper account title.

What Happens if a Beneficiary Dies

In addition to the account title, there are also other issues that could reduce your FDIC coverage. If the POD beneficiary dies, the coverage is reduced immediately. Example #18 of this FDIC page describes this.

Joint Accounts and Signature Cards

Thanks to an investigation by another reader, I just learned of another potential issue that could reduce your FDIC coverage. This one involves joint accounts. As described at this FDIC page, a joint account for a husband and wife can qualify for $200,000 in FDIC coverage. Note the three conditions listed at that FDIC page which must be met. One of the conditions that applies to savings accounts states "Each co-owner must personally sign the account signature card." This concerned the reader when he had applied for an Indymac money market account since it can take several weeks before you receive the signature card from Indymac. The reader recommended that you stay under $100,000 during this period. Below is what he received from the FDIC:

If the joint account is opended as a Market Market Deposit Account (MMDA), then it is important to have all owners of the deposit sign the signature card, otherwise if the bank were to fail the FDIC could make the determination the account is insured under the single ownership category in your name only for up to a total of $100,000.

He was also concerned about online banks that do not require a paper signature card. According to the FDIC representative, "the attachment or use of an electronic signature does satisfy the FDIC requirements for deposits including joint accounts." So you should be safe with online joint money market accounts that only have electronic signatures.

Make Sure You Consider the Accumulated Interest

Unfortunately, the reader with the ANB Financial CD may lose the interest he earned. He had let the interest be added back into the principal of the CD, and the total balance exceeded the $400,000 insured limit.

If you specify that interest payments are to be added to the principal, make sure the total amount will always remain under the insurance limit during the entire CD term. Most banks also allow you to withdraw interest without penalties. Another option is to specify that interest be paid to you by check or be transfered to another bank.

Monitor Your Banks

One more lesson the reader mentioned was to carefully monitor your bank's condition. This is a good idea, but I wouldn't recommend this as an alternative to maintaining deposits under the FDIC limits. The bank's financial data that is publicly available is often at least 3 months old. The safety ratings issued by Bankrate and BauerFinacial are even older than this. You may be able to pick up on other clues that show the bank is in trouble, but these signs can be easy to miss.

Summary

In summary, the reader provided the following lessons learned which sums up many of the above details:

Be a bulldog on FDIC requirements for account titling. Do NOT take the word of any CSR such as "Don't worry, it's OK." Make certain the accounts are titled exactly as required.
Monitor your bank's evolving condition.
Withdraw interest at every available opportunity and put it somewhere else. Whatever little pittance you might gain through compounding pales in comparison to the total loss of your interest!
For more information and links on FDIC coverage and on NCUA coverage for credit unions, please refer to my post from last year. I have a short list of important FDIC and NCUA links in this post.

Thanks to this reader who emailed me his experience with ANB Financial. Also, thanks to the reader who informed me about the Joint Account issue, and other readers who shared their experience on FDIC insurance issues.