Protection – Not just for teenagers

Protection comes in many forms and while not all levels of protection will apply to everyone, everyone should have at least a level or two in place, regardless of their age, gender, activity level, etc…

Let’s start with the one nearly everyone has – FDIC (Federal Deposit Insurance Corporation). Right off the bat, let’s clarify that FDIC coverage applies only to banks, not credit unions, not money markets, and not savings & loans (although there aren’t too many of those these days). If you have money at a bank, the standard coverage is $250,000 per depositor (identified by their Social Security number) per account ownership category. What? Huh? Let’s do an example:

  • You have $60k in a personal individual savings account (1) and another $13K in a joint checking account (2) and a further $350k in an IRA CD all at the local “Small-Town Bank.” Now, let’s suppose that this Small-Town Bank is being run by the founder’s grandson and he has parked the majority of the bank’s assets in a variety of crypto currency and perhaps embezzled a dollar here and there (we can talk about compliance and oversight another day). You would be insured for 100% of your savings account (ownership category – individual, savings), 100% of your joint checking (ownership category – joint, checking), but only $250k of your IRA (type of ownership – IRA, CD).

This is one of the reasons we talk about making sure we never have too much in any one bank. Too much and you might not get it all back. The other thing to remember about FDIC coverage is that it’s not instantaneous, like getting a life insurance payout. It can take weeks or months to settle up with depositors after a banking issue. And lest you think this sort of thing doesn’t happen outside The Great Depression, 561 banks failed from 2001 through 2020 so this isn’t an outlier sort of issue.

What if you primarily bank at a credit union? Most credit unions are covered by the National Credit Union Share Insurance Fund which operates in a way similar to the FDIC with a few slight nuances. Participation in the National Credit Union Agency (NCUA) is voluntary and not all credit unions are covered so you should definitely make sure your credit union is a member (there should be a logo at the branch office or you can ask). You are covered up to $250k per depositor, much the same way you are with FDIC coverage, although it is broken down by “share ownership” rather than “account ownership.”

Let’s kick it up an investing notch and talk about your investment accounts, which is a little more complicated because you own shoes in those shoeboxes (and if you haven’t heard me run through this analogy, we can talk…). The Securities Investor Protection Corporation (SIPC) insulates investors from the risk of a brokerage bankruptcy. You are covered up to $500k but only $250k of that can be in your cash accounts, and again, this coverage is based on ownership. If the brokerage account provider itself goes belly-up, then the SIPC coverage kicks in. If one of the holdings in that brokerage account goes belly-up, that generally isn’t covered. If the holding is truly worthless and in your individual after-tax account, you can get a worthless security certificate and sort it out on your taxes but if it is in your IRA or Roth, there’s a good chance you’re out of luck (this would be considered a poor investment choice). You are probably in good hands if you are using one of the big firms (Schwab, Vanguard, Fidelity) but there are hundreds of smaller brokerage firms and some are certainly run better than others.

What might be another way to protect your investments? Depending on your situation and needs, you could consider changing the ownership of your after-tax investments to a Trust, or depending on your situation, your spouse. We often see this when one spouse works in a field where litigation is common (like the medical field).

What if we need to protect someone from themselves? If we create a Trust then retitled the assets in question out of someone’s name and into the Trust’s ownership, you are able to create a layer of protection between that person and their ability to invest those dollars in their best friend’s newest “best idea in the world.”

Those are complicated options so what might be a very simple way to put some protection in place. Good old diversification. Diversification is the Swiss Army Knife of investing – it can help with so many issues and is relatively easy to do and maintain.

So, there you have it. A multitude of ways to protect your investments and not an STD in sight.