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1)
Safety of your Bank Accounts:
If your bank becomes insolvent, Federal Deposit Insurance
Corp (FDIC) will insure all deposits at insured banks,
including checking, savings accounts, money market
deposit accounts, and certificates of deposit (CDs),
up to certain limits. The financial-rescue bill that
was passed October 3, 2008 temporarily increased the
limits for FDIC coverage. You now have $250,000 in
FDIC coverage for single accounts and $250,000 in
your share of joint accounts at each bank. The increase
in coverage is temporary and is scheduled to end on
December 31, 2009. Certain types of retirement accounts
are also covered by FDIC, including IRAs, Roth IRAs,
SEP IRAs and Keogh plans. All deposits in these types
of accounts are added together and insured up to $250,000
per person. The FDIC does not insure the money you
invest in stocks, bonds, mutual funds, annuities,
or municipal securities, even if you purchased these
products from a FIDC insured bank.
The
following is from the FDIC website:
All other deposit accounts at FDIC-insured institutions
are insured up to at least $250,000 per depositor
until December 31, 2009. On January 1, 2010, FDIC
deposit insurance for all deposit accounts-except
for certain retirement accounts-will return to at
least $100,000 per depositor. Insurance coverage for
certain retirement accounts, which include all IRA
deposit accounts, will remain at $250,000 per depositor.).
FDIC
coverage for accounts owned by Living Trusts is different.
You can use the calculator on FDIC website to figure
out how much is insured. The new increased limit became
effective October 3, 2008. As long as your account
balance stays below that limit, you're safe if your
bank is covered by the FDIC. You can also check your
bank's FDIC status at www.FDIC.gov.
2)
Safety of your Mutual Funds:
Mutual funds are subject to very strict regulations
that protect your money. The Investment Company Act
of 1940 created an intricate system of checks and
balances to keep mutual fund money safe. Each mutual
fund is organized as a separate company from the fund's
management, and its assets are held by an independent
custodian, usually a specialized bank. Even if the
fund-management company goes bankrupt, its creditors
can't touch the money in the mutual fund, which is
held in a separate trust for investors. The Investment
Company Act of 1940 also requires a percentage of
the fund's board to be independent from the fund's
investment adviser. And it requires anyone who has
access to the fund's securities to hold a fidelity
bond, which would pay out if someone did manage to
steal any of the money.
If
your mutual fund shares are held in a brokerage account,
they are protected by SIPC (The Securities Investor
Protection Corporation, www.SIPC.org)
just like other securities if the brokerage firm goes
bankrupt. SIPC first tries to transfer the investors'
securities to another firm. If that doesn't work,
it then attempts to rebuild the investors' portfolios,
even buying new stocks or bonds to make up for any
missing shares. SIPC first returns your share of the
broker's remaining assets, then uses its own funds
(up to $500,000 per account, including a $100,000
limit on cash) to buy the same shares that you originally
owned. If the investments aren't available, SIPC will
give you cash based on their value when the brokerage
failed. The $500,000 limit applies only to the maximum
amount of its own money SIPC will spend to make up
for any missing securities, not the total amount of
money you can get back. If the customers' assets remain
largely intact at the brokerage firm, then you can
get back a lot more than that SIPC limit, which is
a key difference between how SIPC protects brokerage
customers and how the FDIC covers bank depositor.
In the 38-year history of SIPC, only 349 people have
not received the full value of their accounts from
their share of the firm's assets plus SIPC coverage
- and most of those instances occurred three decades
ago or more. If an investor's losses exceed SIPC's
limits, the difference is usually covered by the broker's
supplemental insurance - often provided by Lloyd's
of London.
These
Protections, of course, have nothing to do with the
value of the shares, which will rise and fall depending
on the value of the underlying investments.
3)
Safety of your Life Insurance:
Most Insurance policies are not covered by SIPC or
FDIC. However, the state insurance departments set
strict capital requirements to make sure insurance
companies can pay claims. As a matter of fact, AIG's
insurance subsidiaries are solvent and have assets
available to pay claims, and are not suffering from
the same financial troubles as other parts of the
company. And if your policy is acquired by another
insurance company, the terms of the contract cannot
change. The premiums you pay and any guarantees you've
been promised will continue for the term of the policy.
If
the insurance companies did end up having financial
troubles, then the insurance department in the company's
home state would try to rehabilitate the company.
If that didn't work and the company became insolvent,
then the state guaranty associations would protect
policyholders by continuing the insurance policies
and paying claims, up to certain limits. The maximum
limits on protection vary based on the policyholder's
state. California's guaranty association provides
coverage for 80% in life insurance death benefits
up to a maximum of $250,000 per insured life, up to
$100,000 in cash surrender or withdrawal value. But
policyholders often receive even more than the guaranty
association limits because policyholder claims are
given priority over other creditors. You can find
out the detail of California's limits and protections
at California Life & Health Insurance Guarantee
Association's website at www.CALIFEGA.org.
4)
Safety of your Annuities:
The protection of annuity contracts depends on the
type you have. If you have a variable annuity, your
investment is held in separate accounts that are invested
in mutual funds and wouldn't be affected by the insurance
company's financial situation. See above about the
safety of Mutual Funds. If you have a fixed annuity,
or an annuity with guaranteed minimum income benefits,
then you should keep a close eye on the insurance
company's financial strength. But you have several
layers of protection if the insurance company's financial
status were to change. If an insurance company did
have financial troubles, then state regulators would
take it over and try to rehabilitate the company.
If that didn't work and the insurance company became
insolvent, then policyholders would be protected by
the guaranty association in their state. California's
guaranty association protects 80% of the present value
up to a maximum of $100,000 in withdrawal and cash
values for annuities. But Mr. Peter Gallanis, president
of the National Organization of Life and health Guaranty
Associations (www.NOLHGA.com)
says that people generally get back much more money
than those limits. Life Insurance companies are required
to hold a high level of reserves to pay claims, giving
them a lot more money to distribute if they do have
problems. You can find out the detail of California's
limits and protections at California Life & Health
Insurance Guarantee Association's website at www.CALIFEGA.org.
5)
Safety of your Money-Market Mutual Funds:
Money-market mutual funds are covered by the new government-sponsored
insurance program, if the fund company chooses to
pay the fee to participate in the program. The temporary
insurance will cover assets that were in money-market
funds as of September 19, 2008. If a money-market
fund that participates in the program falls below
a $1.00 net asset value, the program will provide
coverage for shareholders up to the amount they owned
on September 19 (shares purchased after that date
are not covered). For more information about the program,
see FINRA's Investor Alert about the Treasury's Guarantee
Program on FINRA's website: www.FINRA.org.
(FINRA=Financial Industry Regulatory Authority)
6)
Safety of your Retirement Account:
If you are in accumulation phase and have years until
retirement, you may want to stay diversified. This
bear market will lose its bite before you're ready
to retire, so you'll benefit by making investments
at this year's depressed levels. There might be advantage
to putting new money in a fund that's already down
significantly, but it all depends on your risk tolerance.
If you've been contributing to your 401k, IRA, or
other retirement account at regular intervals (weekly,
bi-weekly, monthly, etc.), you've been taking advantage
of "Dollar Cost Averaging". I recommend
you to keep doing so and stay diversified. If
you have accumulated a comfortable nest egg that has
achieved your goals up to this point, you might want
to review your portfolio allocation with your financial
advisor.
(The
opinions voiced in this material are for general information
only and are not intended to provide specific advice
or recommendations for any individual. To determine
which investment(s) may be appropriate for you, consult
me prior to investing. )
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