1 October 2007 1169 views 2 Comments Print This Post  Email This Post

When you think about investment risks and market downturns, you would generally think that savings accounts, CDs, and Money market savings accounts would be the a safe way to store your money to avoid those things. Thats what Applied Cognetics, a small software development and online marketing firm thought. The founders had about $1 Million in deposits at NetBank, according to CNNMoney. If you’ve been watching the news lately, you’ll know that NetBank has officially failed and is now taken over by the FDIC and ING Direct. Although the bank has $2.5 Billion in assets, Applied Cognetics are over the FDIC’s $100,000 insured limit, and the rest of their money’s fate is unknown. The young company is now facing a major cash crunch. The take home message in all of this is to make sure you understand how the FDIC’s insurance works so you’re never in that position.

What is the FDIC and what does it do for us?

The Federal Deposit Insurance Corporation is a government corporation formed in 1933, after a vast number of bank failures crippled consumer confidence during the great depression. The FDIC offers deposit insurance to it’s insured banks for the amount of $100,000 per depositor. The amounts are sometimes more, up to $250,000 for IRAs. If a bank fails, the FDIC will, under the payoff method, pay the depositors themselves then try to recoup the cost by liquidating the failed banks assets. What they may also do, such as in the case of NetBank, is bring in another bank (ING Direct), who will assume the deposits and purchase some of the bank’s remaining assets. Either way, your money is safe as long as you’re not over that amount.

The surefire way to protect your money, if you have over $100,000 sitting around, is to split your deposits into several different accounts at different banks. However, for those who prefer to stay with one bank, there is a easier way. The FDIC will insure up to $100,000 per depositor at an insured bank. This means that if you hold accounts as several different entities, you can get up to $100,000 of insurance coverage on each. For example, Bob Smith can have one account, so can Bob Smith + Wife can have a joint account with $200,000 of coverage. Wife can have another $100,000 of coverage in her individual account, making it a total of $400,000 of coverage for this couple. To take it even further, those individuals can hold accounts in the form of trusts and get additional coverage since the trust is also a separate entity.

Personally, I’m not one of those people who has to worry about that quite yet, but its good to know the best way to have the ultimate protection. This is something I should look into for my parents, however, who at their age cannot afford to lose any of their money due to bank failure. I still think bank failure is unlikely to happen often, but with the sub prime mess and major loan defaults, its best to play it safe. Neither the FDIC nor your own bank will inform you prior to bank failure. I hope Applied Cognetics and their founders, as well as all NetBank account holders make it through this tough time. Its heart breaking to see fellow entrepreneurs, who devoted 10+ years into accumulating these funds, face the possibility of losing most of it.