Big savers find ways to ensure safety of deposits

As the financial system reels from one disaster after another, financial planners, estate planners and bank officials say they've been receiving calls from panicked savers concerned about the safety of their deposits.

The Federal Deposit Insurance Corp. guarantees bank deposits up to $100,000 per person, per insured institution. But what if you have a lot more cash than that?

For years, savers have gotten around the FDIC's $100,000 limit by spreading their cash across multiple institutions. It's certainly safe, but it's an onerous process. Now, growing numbers of people are turning to other means that allow them to keep hundreds of thousands of dollars safely stowed away under FDIC protection.

So far this year, about a dozen banks have failed, and 117 banks that were on the Federal Deposit Insurance Corp.'s “watch list” at the end of the second quarter.

One product that has been attracting attention lately is an informal trust account known as a “payable on death,” or POD, account. To set up a POD account, depositors must name a beneficiary or beneficiaries who will receive money if the primary account holder dies. For each qualified beneficiary, the FDIC will boost insurance coverage by up to $100,000.

Other strategies include:

Brokered CDs. Buying multiple certificates of deposit at once through a brokerage firm provides a fast way to spread out money across different institutions, capturing the full FDIC protection.

In recent weeks, Dan Kohn of New York started using brokered CDs through Vanguard Group's Vanguard Brokerage Services as a way to quickly spread out his money across different banks. He could probably find higher yields by searching for local deals, but brokered CDs provide a “mixture of convenience and safety,” says the 35-year-old.

CDARS. This deposit-placement service, short for Certificate of Deposit Account Registry Service, disperses deposits into different individual CDs of up to $100,000 each, up to a maximum covered amount of $50 million. Customers deposit their money with a participating bank, and CDARS – which is run by the Promontory Interfinancial Network LLC in Arlington, Va. – disperses the deposit in individual CDs up to $100,000 in 2,350 member banks across the country.

Retirement accounts. Money deposited in IRAs, Roth IRAs and certain other retirement plans is insured up to $250,000.

Joint accounts. Deposit accounts owned by two or more people are insured up to $100,000 for each account holder listed.

Credit unions. Deposit insurance for credit unions works in much the same way as FDIC insurance does for banks and thrifts, except that the funds are insured by the National Credit Union Share Insurance Fund.

Revocable trusts. Under this estate-planning strategy, the owner assigns beneficiaries but retains control of the assets during his lifetime. The FDIC insures the interests of each beneficiary up to $100,000 each. Some are formal trusts, which are typically set up by an estate attorney. Others, such as POD accounts, can be created when the account owners add certain terms and the names of the beneficiaries to the bank's account records.

William Wright, a financial planner in Wichita, Kan., says he's working with one client who has more than $1million at a local bank to move the money into other types of deposit accounts, such as trust and joint accounts, and products such as annuities.

Last spring, Robert Ring of Boise, Idaho, added his three children as beneficiaries to a money-market deposit account at IndyMac Bank. That meant his account, which totaled $300,000 at the time, was fully insured.

Thanks to that move, “it was a total nonevent for me” when IndyMac collapsed in July, says the 39-year-old software engineer. “I heard about the closure on a Friday afternoon, and all my money – about $150,000 at the time – was there the following Monday.” He's also using PODs to protect money he's parked in a savings account at Alliant Credit Union in Chicago.

Despite the multitude of options, many savers still choose to spread their risk around by simply opening accounts at different banks. D.C. Harris, a retired accountant who lives in the San Francisco Bay area, had her money parked in a CD at Wachovia Corp. But worries about the solvency of that bank and others, such as Washington Mutual Inc., recently prompted her to put her savings in CDs at other banks, including Citigroup Inc.'s Citibank.

“I'm more scared than I've been in my life about our economy and our banks,” says the 65-year-old. “I'm thinking about moving my money to United Bank of the Mattress.”