Share Insurance Coverage is Dynamic

In the past months, many questions have come to NAFCU, NCUA and credit unions regarding how members can structure their accounts to maximize share insurance.  As I indicated last week, NCUA issued a Letter to Credit Unions highlighting the importance of educating members on share insurance.

An important concept that should not be overlooked is that share insurance coverage is not static.  It is not a number that can be calculated once and forgotten.  Rather, share insurance coverage is dynamic and can change when the underlying facts and circumstances change.

For example, Hank and Wendy open a joint revocable trust account payable-on-death (POD) to their three children (Amy, Bill, & Charlie) as the beneficiaries.  Since the three children are qualifying beneficiaries of both the husband and the wife, the account is insured up to $600,000.  See 12 C.F.R. 745.4(f).

The insurance comes out like this:

Hank has an ownership interest in the POD account of $300,000.
Hank's ownership interest is insured up to $300,000 based on $100,000 each from Amy, Bill, and Charlie as qualifying beneficiaries.

Wendy has an ownership interest in the POD account of $300,000.
Wendy's ownership interest is insured up to $300,000 based on $100,000 each from Amy, Bill, and Charlie as qualifying beneficiaries.

The account is, currently, insured for up to $600,000.

However, a change in circumstances could change the share insurance coverage.  If Hank were to pass away, the insurance coverage of the account would be reduced to $300,000 after the expiration of a six month grace period.

Part 745.2(e) of NCUA's Rules and Regulations states: 

"(e) Continuation of insurance coverage following the death of a member. The death of a member will not affect the member’s share insurance coverage for a period of six months following death unless the member’s share accounts are restructured in that time period. If the accounts are restructured during the six-month grace period, or upon the expiration of the six months if not restructured, the share insurance coverage will be provided on the basis of actual ownership of the accounts in accordance with the provisions of this part. The operation of this grace period, however, will not result in a reduction of coverage."

The death of Hank would remove the insurance coverage that he receives through his 3 children.  If no changes are made to the account, the account would be insured only up to $300,000 (Wendy would still receive $100,000 for each Amy, Bill, and Charlie but the coverage from Hank would no longer be available).

A similar situation would occur if a beneficiary passes away.  If Bill were to pass away, the account's share insurance coverage would drop to $400,000 (Hank and Wendy each get $100,000 in coverage for Amy and Charlie).

These are just a few ways the underlying facts and circumstances for your share insurance calculations could change.  Understanding an account's share insurance coverage can vary and is not set is stone is a crucial step in ensuring your members have the ability to maximize their share insurance coverage.