Two inherent absurdities flaw the FDIC system. I’ve always found it absurd that innocent depostitors were led to put more than $100,000 in a bank under the “promises” of FDIC insurance. The banks and depositors were encouraged to look the other way and discount the known flaws in this insurance system.
1. In general the insurance is only tentative:
it is not confirmed to be good coverage until after the bank fails.
Would you settle for a year of home fire insurance from an agent who says that if the house burns down during hte year, maybe you have converage for the whole $300,000 value, or maybe you have coverage for only the first $100,000, we will only find out after the house burns down?
That’s how FDIC insurance is provided to depositors.
There is an obvious solution. Under the current inadequate system,
depositors are told by the FDIC to check on line to verify what the FDIC coverage is. Of course that “verification”
is comnpletely non-binding on the FDIC.
Instead, the FDIC should authorize a qualified bank rep to check this when an account is opened it is made and to provide a binding determination of insurance for the account, or to indicate that the funds should be deposited eleswhere. If the website works for the ignorant depositor, then a bank manager should be capable of conclusively figuring it out, and the FDIC insurance should be binding for a clearly specified time period.
(Of course implicit in this is the fact that FDIC coverage needs to be
simplified so that the FDIC can be confident that a trained bank manager can make a proper determination.)
2. Even if your FDIC coverage is good when you make the deposit, the insurance can be lost (that is reduced significantly) by events occurring after the coverage starts).
If you have FDIC coverage based on trusts, beneficiaries and/or joint owners, the death of an individual can cut coverage by 50% or more.
Would we accept fire insurance that gets cut in half just because one of the named residents had the bad form to up and die at the wrong time?
Insurance offered for a term CD should be deternined and considered good for the term of the CD plus a grace period necessary to withdraw or renew, regardless of who dies during that time.
Or sell a term life insurance policy with the CD to pay the lost FDIC coverage. Depositors should not be playing a negative lottery hoping there is no death.