How new bank deposit coverage may affect you

If the beaten-down stock market has got you seeking a haven for your cash, there's some good news.

The financial system bailout legislation enacted last month boosted limits on federal insurance for bank deposits, increasing the amount of cash you can stash in a bank account with every dollar fully insured by the government.

And the Federal Deposit Insurance Corp. has made it easier to structure your accounts in a way that maximizes your total coverage.

Here's a rundown of the changes:

What's different?

Until last month, the FDIC covered deposits of as much as $100,000 per owner per bank. For individual retirement accounts that hold bank deposits, the limit was $250,000 per owner.

The bailout legislation raised the insurance limit on nonretirement accounts to $250,000.

There are tricky but perfectly legal ways to significantly increase that coverage, however, even if you keep all your deposits in a single bank.

How do I raise my coverage?

The FDIC insures accounts based on their ownership status. For instance, you can have an individual account, a joint account, an IRA and a business account. Technically, each account has a different owner. If the accounts are set up properly, each is covered separately under its own insurance cap. Under the old limits, that would mean those four accounts could have as much as $550,000 in coverage (three at $100,000 each and the IRA at $250,000). Under the new limits, that maximum coverage rises to $250,000 per account, or a total of $1 million.

And there's a way to have even more deposits covered -- a whole lot more if you have many people you'd like to leave money to after you die.

What's that about inheritance?

Another form of ownership that the FDIC gives separate coverage to is a trust: an account for which you name one or more beneficiaries who will inherit the money after your death. Under FDIC rules, the account gets an additional $250,000 in coverage for each beneficiary named.

Until recently, the FDIC extended that extra coverage only for beneficiaries who were close relatives, such as a child, grandchild, parent or spouse. Now, the agency says any living person can be a qualified beneficiary.

"So Bill Gates could essentially set up an account, name every person in the country as equal beneficiaries, and his billions would be fully insured," said David Barr, an FDIC spokesman.

What's to stop me from naming all my friends as beneficiaries?

Nothing, if you really want to leave them the money. If you die while the beneficiary designations are in place, the assets in a pay-on-death account will go to the named beneficiaries no matter what other arrangements you might have made in your will.

Do I have to set up a "living trust" to name beneficiaries?

No. Banks can help you set up a simple trust through a "pay on death" account. In some ways, these are preferable to a living trust, with which you might be tempted to do something tricky -- such as give different beneficiaries varying portions of your assets -- that could have an effect on FDIC coverage.

Are these changes permanent?

Yes and no.

The relaxation of the rule governing trusts, which the FDIC did on its own, is permanent.

But the increase in the insurance limit per account owner to $250,000 from $100,000 is temporary. Under the bailout law, the higher caps expire at the end of 2009.

If you decide to take advantage of the higher limits, you'll need to set an alert in your electronic calendar or find another way to remind yourself to restructure your accounts before then.

What about business accounts? I heard a number of small businesses lost money when IndyMac Bank failed because their checking accounts used for payroll exceeded FDIC limits.

That's true. That issue is addressed by new -- but temporary -- FDIC rules. Until the end of 2009, "non-interest-bearing transaction accounts "-- essentially business checking accounts -- get unlimited FDIC coverage.

There are two important caveats, besides the expiration date, however. Banks must pay extra to provide this coverage, so some may opt out. If you want to make sure that your bank is included in the plan, check with the FDIC. The agency is keeping a list on its website of banks that have opted out.

The other caveat is that this extra coverage applies only to accounts that earn no interest. If your business checking account pays even a token amount of interest, it does not qualify.

Do I need to keep documentation to prove my accounts are fully insured?

It shouldn't be necessary, but it's never a bad idea to save the documents you got when you opened an account. These should clearly state the type of ownership on the account, such as individual, joint or pay-on-death. If your bank fails, those papers could come in handy.

What about people who lost money in a recent bank failure because some of their deposits were uninsured? Can they recoup their losses under the new, higher limits?

Unfortunately no. The rules are not retroactive.