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When Silicon Valley Bank recently failed, much was written about the various tactics to get your cash insured beyond the standard FDIC levels. However, very little was discussed about the Depositors Insurance Fund, created in 1934, which provides deposit insurance above and beyond the FDIC level of $250,000.
Most wealthy individuals know that the Federal Deposit Insurance Corporation (FDIC) is a U.S. government agency that provides insurance for deposits in banks and savings institutions. The FDIC was established in 1933 in response to the widespread bank failures of the Great Depression. Today, the FDIC insures deposits of up to $250,000 per depositor, per insured bank. This means that if a bank fails, each depositor is guaranteed to receive up to $250,000 of their deposits back from the FDIC.
However, some depositors may have more than $250,000 in a single bank account, which means that their deposits are not fully insured by the FDIC. In recent years, new solutions have been created to get more cash insured, which means using a service that in essence, opens many additional accounts at other banks.
An additional service, The Depositors Insurance Fund (DIF) for free and automatically, provides additional insurance coverage above the FDIC coverage for all of your cash. The DIF is a private, industry-sponsored insurance fund that provides additional deposit insurance coverage to eligible accounts beyond the FDIC limit. The DIF was created by the Massachusetts legislature in 1934 as a response to bank failures in that state, and it is currently administered by the Massachusetts Division of Banks.
The DIF is funded by its member banks, which are required to contribute a certain amount of their deposits to the fund each year. The fund is managed by a board of trustees, which is responsible for setting the premiums that the banks pay (not the depositors) and assessing the risks of member banks.
To be eligible for DIF coverage, an account must be held at a DIF member bank, and it must be a deposit that is insured by the FDIC. In other words, the DIF provides additional insurance coverage on top of the FDIC insurance. This also means you must open an account at a bank in Massachusetts. Most of their member banks accept deposits from out of state customers.
The DIF does not have a limit on insured deposits. However, the amount of DIF coverage varies depending on each participating banks’ policies. Also, per their website, no one has ever lost money at a DIF insured bank, noting that despite a number of bank failures in Massachusetts in the early 1990s, much was paid out but all depositors received the entirety of their cash back.
Not all banks are members of the DIF, and not all accounts are eligible for DIF coverage. Before opening an account at a bank, it’s a good idea to check whether the bank is a member of the DIF and whether your account will be eligible for DIF coverage. A list of the participating banks is also on their website.
Your financial advisor should always be consulted to review all the new and old options for insuring excess cash in addition to reviewing if you should put that extra cash in other investment vehicles, given the historically low interest rate environment we are in.