It's Time For Savers To Check Their Safety Nets

Failing banks and thrifts, teetering insurers and credit unions, municipalities defaulting on their bonds. Bad news about America's financial institutions has increased investors' concern over the safety of their funds.

To increase your own sense of security, now is the best time to take a closer look at what federally backed insurance covers--before your bank, credit union, or brokerage firm runs into trouble. You might also want to check what the "insurance" or "guarantee" on other investment products really means.

Despite a flurry of banking failures, money managers still consider deposits backed by the U. S. government safe. But "there are a lot of people who have more in the institution than is covered by the insurance," says Jonathan Pond, author of Safe Money in Tough Times (Dell, $4.95).

--Bank deposit insurance. Although the Federal Deposit Insurance Corp. insures most bank and savings and loan accounts for up to $100,000, it lumps together similar accounts. Thus, if you have a combined $150,000 in your savings and checking accounts, only the first $100,000 is covered. Joint and retirement accounts are not lumped with individual accounts, but they are still governed by the $100,000 threshold for like accounts. It makes sense then to move any amount over the limit into another bank. Otherwise, you could lose money if the bank fails, as 168 did in 1990. Depositors at Freedom National Bank of New York, for example, lost 50~ cents on every dollar above $100,000.

-- Credit union insurance. Ninety percent of all credit unions are insured up to $100,000 per account by the National Credit Union Administration. As with the FDIC, if you have a joint account or similar accounts, such as two IRAs, worth more than $100,000, you may be out of luck if your credit union fails.

-- Brokerage insurance. If your stock portfolio's value falls, that's a problem between you and your broker. But if your brokerage house fails, the federally backed Securities Investor Protection Corp. insures your account up to $500,000. But only $100,000 of that amount covers cash, such as funds held after the sale of securities. The rest is used to replace lost securities. An investor whose $500,000 portfolio is heavily invested in cash and light on securities might lose a bundle if the brokerage firm tanks. Still, the trend is on your side. Since 1970, the SIPC has covered accounts up to the $500,000 limit at 215 failed broker-dealers without a problem. The failure rate currently averages about seven a year, and that doesn't include big brokers such as Drexel Burnham Lambert, which paid clients before liquidating.

-- Mutual funds. The closest you can get to an "insured" mutual fund is by buying one that owns a portfolio of municipal bonds backed by private insurers. Anything else is a marketing gimmick. Last fall, the Securities & Exchange Commission warned government bond funds to stop using "insured" or "guaranteed" in their titles. The reason: Investors might wrongly believe that the government also protects them from market risk. Government securities may be guaranteed, but share values in mutual funds that invest in bonds fluctuate with interest rates. The SEC warning has led several bond funds to change their names.

-- Insured muni bonds. Municipal bond defaults rose by 50% in 1990, to $1.5 billion, resulting in a brisk demand for insured munis. The underwriters are large private insurers such as the Municipal Bond Insurance Assn. and the American Municipal Bond Assurance Corp. The insurance guarantees the regular payment of interest for the life of the bond. It also covers the principal amount of the bond at par in case the municipality or issuer defaults.

That means it might be many years before you get your principal back, since insurers aren't obligated to make good on the principal amount until the bond matures. But at least you have the interest. Although a settlement appears imminent, investors have been waiting eight years for any payment on the uninsured bonds for Washington Public Power Supply System's projects Four and Five. The utility's failure to complete the projects led to the biggest municipal bond default in history.

-- Guaranteed investment contracts. Insurance companies guarantee a set return on funds sold to pension and profit-sharing plans such as 401(k) plans. But unlike Treasury bonds or insured deposits, GICs are guaranteed because the insurer says so--not the federal government. If the insurance company goes belly up, so may its GIC. To date, no insurer has failed to deliver on its promise. But if you're concerned about the health of the company backing the GICs in your 401(k) plan, check its credit rating with your corporate benefits office. If the rating is less than investment grade--BBB--you might switch to other options.

-- Mortgage-backed securities. Brokers wax enthusiastic about Government National Mortgage Assn. securities because the government insures the timely payment of principal and interest. But as with bond funds, the government does not guarantee a Ginnie Mae's yield or its life span. As interest rates decline, homeowners with high-rate mortgages tend to refinance them at lower levels. Instead of a steady income paid over the decades, Ginnie Mae investors may wind up getting all their principal back well before the security is supposed to mature.

So what's the best insurance? Diversification. By spreading your wealth among stocks, bonds, cash, and tangibles such as real estate, your portfolio should weather the worst news.

      Publication/Subject       Where to write
      HOW SIPC PROTECTS YOU     Securities Investor Protection Corp.
      BROKERAGE INSURANCE       Suite 800, 805 15th St. NW
                                Washington, D.C. 20005
      YOUR INSURED DEPOSIT      FDIC Consumer Affairs
      BANK DEPOSIT INSURANCE    550 17th St. NW
                                Washington D.C. 20429
      YOUR INSURED FUNDS        Office of Public and Congressional
      CREDIT UNION INSURANCE    Affairs, National Credit Union
                                Administration 1776 G St. NW
                                Washington, D.C. 20456
      DATA: BW
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