How can I maximize my FDIC insurance?

March 19, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Q: I'm about to sell my private business and will have several millions to bank from the proceeds. I'm concerned that the FDIC only insures up to $250,000. Does it make sense to deposit in multiple banks, or is there a better approach?

A: If you want to be fully protected by FDIC insurance for the kind of money you mention, then most likely your only option is to spread that money out among a few different banks. This can be a nuisance, but at least it is easier than it would have been a few years ago, when the limit was just $100,000.

The question then becomes one of how to minimize the number of banks have to use. First, though, it is important to review a couple of ground rules of FDIC insurance. This insurance applies to deposits in checking accounts, savings accounts, money market accounts, and CDs. Many banks today offer a variety of investment products, and these products are not covered by FDIC insurance. So, be sure you choose one of those basic deposit products, and have the bank confirm that it is an FDIC-insured account.

Second, the basic rule governing the insurance limit is that it applies per depositor, per institution. So, if you have a checking account and a money market account in your name at the same bank, FDIC insurance only covers a combined total of $250,000. So, simply opening multiple accounts with one bank isn't the answer.

However, the definition of what the FDIC means by "per depositor" is important. A retirement account is considered a separate depositor from the accounts beneficiaries, and a husband and wife in a joint account are each considered separately. Someone in your position of selling a business might still have some money in the name of a corporate entity; this too could be considered a separate depositor if not being used immediately for personal purposes. In short, to the extent you can use retirement accounts, corporate accounts, and joint accounts to spread your money across different depositors, you might at least be able to reduce the number of banks you have to use.

As a final note, given the amount of money you are dealing with, one alternative you might have is to buy short or intermediate U.S. Treasury securities. These would have the full backing of the U.S. government, and if bought at or below par, and held to maturity, should guarantee your principal and interest. However, this would only give you the safety you are looking for if you held those bonds directly, and not through a mutual fund or other pooled vehicle.

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