What Happens to Your Money If Your Financial Institution Fails or Is Acquired?
What's protected and what's at risk if your bank, credit union, brokerage, or insurance company fails.
Don't panic if one of the financial institutions you do business with is struggling. In many cases, consumers are protected from financial loss, up to certain limits, when a bank, credit union, brokerage, or insurance company fails. To make the best choices and avoid unnecessary worrying understand what assets and policies are protected and how you can maximize your money's security.
Banks and Savings Institutions
The Federal Deposit Insurance Corporation (FDIC), an independent government agency, insures deposit accounts checking accounts, savings accounts, money market accounts that don't contain invested funds, and CDs, for example at most banks and savings and loans institutions.
Is Your Bank Insured?
The easiest way to know if your institution is insured is to look for the official FDIC sign it must be displayed at each teller window. You can also call the FDIC toll-free (877-275-3342), or use the FDIC's "Bank Find" feature, at www.fdic.gov/deposit.
Coverage limits are based on account ownership category and are calculated per person, per bank. In a nutshell, a customer of a single bank could be covered for up to:
- $250,000 in single accounts
- $250,000 in their share of joint accounts
- $250,000 in retirement accounts, but only on money that is in deposits, not investments, and
- $250,000 per beneficiary in a revocable trust.
If you are over the limits, move some of your money into accounts at one or more other insured banks. (To learn more about FDIC insurance, including details of coverage limits, how to monitor your accounts, and what to do if your bank fails, read Nolo's article FDIC Insurance: How Safe Is Your Money?)
What to Do If Your Bank Fails?
If your bank fails, visit the FDIC's Failed Bank List (go to www.fdic.gov, click on "Industry Analysis," and choose "Failed Banks") for important information, including the name of the acquiring bank, if there is one, and how your accounts are affected. Don't rush to the bank to withdraw money you'll probably find that all accounts are temporarily off limits, at least for a few days while the FDIC takes care of administering matters.
Here's what will happen to your money, safe deposit box contents, and arrangements to pay bills and loans through your bank:
Insured deposits and CDs. If your bank is acquired by another bank where you already have deposits, your balances will be insured separately for six months from the date of the merger meaning your combined balances can be over the FDIC insurance limit for six months. If your combined balances do exceed the FDIC limit, move the excess funds to a separate bank before the six-month grace period is up. CDs that mature after six months will be separately insured until their maturity date.
Uninsured deposits. Account holders who have uninsured deposits (that is, deposits over the amount insured by the FDIC) could ultimately recover all or a portion of those funds as their failed bank's assets are sold off, though this could take months or longer.
Safe deposit box contents. If you have a safe deposit box at the failed bank, you will be able to access it as usual if the bank is acquired. Otherwise, the FDIC will contact you with instructions for removing your box's contents.
Direct deposits. Direct deposits will continue uninterrupted if the failed bank is acquired. Otherwise, the FDIC will try to find another bank to temporarily process direct deposits, electronic withdrawals, and bill payments until customers have time to make other arrangements.
Credit and CD terms and payments. Loan terms, CD rates, and other such agreements already in place will not change. Continue making payments on loans and credit cards as before, until the FDIC or acquiring bank instructs otherwise.
Money market accounts. If you have a standard money market account, which is much like a savings account but usually pays higher interest in return for your depositing a minimum amount and making a limited number of withdrawals, you're insured. If, however, your money market account includes an investment component (for example, in T-bills or bonds), you won't be insured. Such accounts are often called "money market mutual funds." (Note: The U.S. Treasury Department's temporary guaranty program for U.S. money market mutual funds that was implemented on September 19, 2008 expired in 2009.)
Credit Unions
The National Credit Union Share Insurance Fund (NCUSIF), an arm of the National Credit Union Administration (NCUA), insures deposits in all federal credit unions. The NCUSIF also protects deposits in those state-chartered credit unions that apply and qualify for the insurance. The dollar limits are the same as what the FDIC provides on bank accounts.
The easiest way to know whether your credit union is insured is to look for the official NCUA sign or symbol at the teller's desks there. You can also call the NCUA toll-free (800-755-1030), or do an online search at the NCUA's website. (Go to www.ncua.gov and click "Credit Union Data," then click "Find a Credit Union.")
According to the NCUA, most states require that state-chartered credit unions be federally insured. Credit unions in states without this requirement will typically be covered by state insurance or private insurance.
The NCUSIF says it will make any necessary payouts to the members of a failed credit union within, typically, three days of the closure.
The NCUA's Share Insurance Estimator helps you check that your accounts are fully insured. (To use the tool, go to www.ncua.gov, click "Share Insurance" in the bar at the top of the page, then click "NCUA Share Insurance Estimator.")
Brokerages are required to hold client assets in separate accounts so that they are not in jeopardy if the company fails. This makes it unlikely that you would lose money even if your brokerage did go bankrupt. In the unlikely event that your assets did disappear, however, the Securities Investor Protection Corporation (SIPC) would protect you.
The SIPC is a private, nonprofit entity that protects customers of those broker-dealers who are SIPC members. To be sure your dealer, brokerage firm, or bank brokerage subsidiary is an SIPC member, look for "Member SIPC" on the business's website, in its ads, or on its signs and literature. Or, search for a broker or company on the SIPC website, at www.sipc.org (click "Who We Are" and then "Member Database"). If you invest through advisers, make sure they're working with SIPC member organizations.
What Is Covered by the SIPC?
The SIPC will replace any missing stocks, bonds, and other securities up to $500,000 per account, including up to $100,000 in cash. Losses exceeding these limits could eventually be recovered if there are adequate proceeds after the firm's liquidation. If you purchase and hold investments exceeding the standard limits, consider working with a broker that carries excess SIPC coverage.
It's important to understand that SIPC protection applies only to stocks, bonds, and other securities missing from a customer's account. This could happen if the broker or company committed fraud, or if it used, rather than separated, customer assets. The SIPC does not protect against the purchase of worthless stocks and securities or against a loss in market value. Also, it does not cover precious metals, foreign currency, or commodity futures contracts.
What Happens If Your Brokerage Fails?
If your brokerage firm is put into liquidation, the court-appointed trustee will send you a claim form and instructions. (For this and many other reasons, it's important to maintain accurate investment records on your own, rather than leaving that task entirely to your broker.) Typically, customers receive their assets in one to three months. However, there could be delays if the broker's records are not accurate or if fraud was committed.
If your account is transferred to another brokerage, you will be notified and given the option of keeping your account there or moving it.
Insurance Companies
In some cases, the regulator in an insurer's home state will manage a failing insurance company until its problems are resolved. During this time, business would go on as usual. This is called rehabilitation.
If the state regulator cannot correct the problems, the insurance company will be liquidated and its policies could be transferred to other, more stable companies. In the process, the guaranty agency or association in each policyholder's state would ensure that any open, unsettled claims were paid.
How Much of Your Insurance Coverage Is Protected?
If an insurance carrier fails, the amount of protection provided for policyholders varies by state and by insurance type. For example, California's Department of Insurance limits its guarantee to $500,000 on property/casualty insurance; $250,000 in life insurance death benefits; $100,000 in life insurance cash surrender value; and $200,000 for health policies. Claims that exceed the state's limits may eventually be satisfied if there are adequate proceeds after the company's liquidation.
Property/casualty and term life. If you have a property/casualty policy or a term life policy and do not have any outstanding claims at the time your insurance company closes, you may be instructed to buy a new insurance policy with another company.
Whole life, universal life, and annuities. Whole or universal life policies and annuities may be transferred to another insurance company. Companies taking over the policies cannot change the terms of the policy, but they can raise premiums or fees. If you don't like the changes, you can cancel your policy and look for a new insurer.
If you buy a new policy, you may have to pay surrender charges, sales commissions, and higher premiums.
Check the Ratings of Your Insurance Company
To check the financial soundness of your current insurance company or one you're considering doing business with, use a ratings service. Options include:
- A.M. Best (at www.ambest.com), or
- www.insure.com (click "Insurance Tools," then "Insurance Company Ratings").
Further Resource
For easy-to-read, practical advice on planning your family's finances, read The Busy Family's Guide to Money, by Sandra Block, Kathy Chu and John Waggoner (Nolo).