Insured CDs–What are they?
Investors who want to diversify their portfolios invest a certain portion of their money into CDs. Investors are safe with investing money into CDs because they are a low risk investment that offers substantial gains over time. Investors have a guaranteed return of the principle that they invest, as long as they keep the money in CDs according to the terms.
What some investors might not know is that not all CDs are insured. Insurance offers investors protection in the event of unforeseen problems with the financial institution. In addition to discussing rates and terms, investors must find out if their financial institution is insured, or they can stand to lose their fortunes during financial hardships.
How do Insured Certificate of Deposit CDs Work?
Financial institutions insure investors’ money in case the banks experience financial hardships. For example, if a bank or credit union fails and they are no longer able to remain open, insuring the deposits makes sure that investors do not lose any of their money. The bank crisis in 2008 is proof that financial institutions must carry this protection for the sake of their investors.
The FDIC or the NCUA protects investors who invest their money in certain financial institutions. The insured amount is up to $250,000 per depositor. This protection allows investors to recoup their original investment amount when financial institutions fail. Not all banks and credit unions carry this protection, especially credit unions. The financial institutions do not volunteer this information. Investors must conduct their own research to find out if the financial institutions are insured. Investors can also ask bank or credit union tellers if the financial institution is insured so that they will know this information before investing in their CDs.
Advantages of Insured Certificate of Deposit CDs
- The investors’ principle is protected. Investors do not have to worry about losing the original amount of money that they invested in their CDs. If the financial institution insures their money, investors are guaranteed to receive their money back up to the insured amount of money. It does not matter how much investors have invested in CDs, they should not invest in financial institutions without this backing.
- Joint depositors receive double protection. Most insured banks offer protection of up to $250,000 on the amount of the deposit. If there are additional depositors on the account, each depositor receive this amount of protection. This feature offers a great deal of protection of investors’ money.
- Some financial institutions offer additional protection. There are agencies who offer additional protection outside of FDIC. First Internet Securities Network (FISN) offers protection for FDIC insured CDs. Investors may not get FISN insured unless their accounts are already FDIC insured. Investors receive $500,000 worth of protection if their financial institution fails for any reason. Not all banks offer this protection so investors must do some research to determine their eligibility for this protection.
Disadvantages of Insured Certificate of Deposit CD
- These CDs have lower interest rates. Financial institutions generally offer higher interest rates when investors’ money is not insured. This method is a trap that they use to get investors to purchase their CDs. Since investors are searching for the highest rates on CDs, it may be easy for them to fall into this trap. In the event the bank or credit union fails, investors are left with nothing from their original investments. Do not be fooled by the high interest rates. The fact that financial institutions are not insured means that they will take a greater gamble with investors’ money.
- Investors lose interest if the financial institution fails. Even though the principle amount is protected, investors lose the interest that their account gains. This loss may affect accounts with larger sums of money more than it affects accounts with smaller amounts of money.
- Deposits over the limit are not insured. The FDIC limit is up to $250,000 at most financial institutions that provide this coverage. It varies greatly by financial institution so investors must determine their coverage before investing their money. Any amount over the limit is not covered if something happens to the bank. An account with an original amount of $250,000 will accrue interest that will put the account over the agencies limit. Investors must verify this information with the financial institution to protect their money.
Investing money in financial institutions that are not insured should not be an option for investors. It is so important to protect the money invested in CDs from bank failures. Do not be fooled by the high interest rates of uninsured financial institutions because it could cost investors all of their CD investments.