What Is FDIC Insurance?

If the thought of bank failure brings to mind panicked customers hammering on the bank's door, here's a chance to learn more about how FDIC insurance can protect you. 

If you've ever wondered about how safe your bank accounts are, the answer can be found in four simple words: Federal Deposit Insurance Corporation (FDIC). But what is FDIC insurance?  

The FDIC is an independent agency of the federal government, created in response to the catastrophic bank failures of the 1920s and '30s. It insures bank and thrift institution deposits so as to minimize the economic impact if a bank or thrift institution fails. If your bank or credit union is one of the 5,303 financial institutions covered by FDIC insurance, you know you have a measure of protection. Making sure your financial institution carries FDIC insurance is one of the best ways to protect your money. 

A piggy bank, a book, and a calculator surrounding a document that reads FDIC insurance.

Image source: Getty Images

How does FDIC insurance work?

Accounts covered by FDIC insurance are covered for up to $250,000 per eligible account if the bank goes belly up, whether the bank is brick-and-mortar or online. In the extreme event that, for example, you have $250,000 in eligible accounts at two different banks and they both fail, the entire $500,000 will be returned to you. This is because coverage limits are $250,000 for each ownership category (which we'll explain below) as well as each insured location. 

FDIC is funded by insurance premiums paid by financial institutions as well as investment earnings. Payouts are made through the FDIC's Deposit Insurance Fund. 

The FDIC has two primary responsibilities:

  • To pay the customers of failed financial institutions up to the insurance limit.
  • To act as the "receiver" of a failed bank, assuming the task of selling assets and settling its debt, including claims for deposits that exceed the insured limit.

What can I expect if my bank fails? 

Although bank failure in the U.S. has been relatively rare in recent years, it has happened. Eight American banks failed in the year 2017 alone. And although that may not sound like much, those banks represent thousands of customers.

Here's what you can expect if your FDIC-insured financial institution fails:

  • You hear through the grapevine or on the news that your bank has failed. The FDIC, which watches banks like a hawk, swooped in so quickly following the failure that you probably did not notice. In fact, you may not know your bank has failed until you receive a letter in the mail.
  • One of the FDIC's responsibilities is to sell the failed bank as quickly as possible by finding a healthy bank to assume the failed business. Say the bank shuts down on Friday. It is not at all unusual for the FDIC to move so fast that it is reopened by Monday morning.
  • Between the time the FDIC comes in and a new bank takes over, you will most likely be able to write checks, use your debit card, and take money from the ATM, at least up to your insured limits. Direct deposits will be rerouted to your new bank.
  • Federal law requires the FDIC to pay deposit insurance "as soon as possible." Although that instruction sounds vague, the reality is that the FDIC almost always pays depositors within a few business days, and often pays the day after a bank has closed.

What are ownership categories?

In order to understand what accounts are eligible, it helps to understand what an account ownership category is. Different types of financial products are broken down into categories, and each category is insured separately. The categories are:

  • Single accounts (owned by one person)
  • Joint accounts (owned by two or more people)
  • Certain retirement accounts (including IRAs)
  • Revocable and irrevocable trust accounts (accounts held in connection to a trust)
  • Corporation, partnership, and unincorporated association accounts (business accounts)
  • Employee benefit plan accounts (including employee retirement accounts)
  • Government accounts (deposit accounts held by government entities)

What accounts does the FDIC cover?

These financial products are covered by the FDIC in the event of bank failure:

  • Checking accounts
  • Savings accounts
  • Negotiable Order of Withdrawal (NOW) accounts (similar to interest-earning checking accounts)
  • Money Market Accounts (MMAs) (an account that pays interest based on current money market interest rates)
  • Time deposit products, such as certificates of deposit (CDs)
  • Cashier's checks, money orders, and other products officially issued by the financial institution in question  

What accounts does the FDIC not cover? 

These financial products are not covered by FDIC insurance:

  • Mutual funds
  • Annuities
  • Life insurance policies
  • Stock investments
  • Bond investments
  • Municipal securities
  • Safe deposit boxes and their contents

Bear in mind that although FDIC does not cover the loss of U.S. Treasury bills, bonds, or notes, these investments are covered by the U.S. government. 

What is the FDIC insurance limit?

The beauty of FDIC insurance is that it covers, dollar-for-dollar, the balance of depositor's accounts, up to the limit. Here is that limit broken down by category:

  • Single accounts: $250,000 per owner
  • Joint accounts: $250,000 per co-owner
  • Certain retirement accounts: $250,000 per owner
  • Revocable trusts: $250,000 per beneficiary
  • Irrevocable trusts: $250,000 per beneficiary
  • Corporation, partnership, and unincorporated association accounts: $250,000 per business type
  • Employee benefit plans: $250,000 per plan participant
  • Government accounts: $250,000 per official custodian

What happens when more than one person owns an account?

This is where it gets a tiny bit complicated. FDIC insurance covers each account owner for up to $250,000. For example, if you share a savings account with your spouse and there is $700,000 in it, each of you will be covered for up to $250,000 for the loss of that account, for a total recovery of $500,000.

But let's say you share that savings account with your spouse and two adult children and that you all have an equal stake in it. Each of you would be insured for $250,000. Because $250,000 x 4 = $1 million, you would easily have enough coverage to recover the entire $700,000 balance. 

How do I know if my bank is FDIC insured?

The first thing you can do is ask. Simply call the bank manager and ask if your deposits are protected by FDIC insurance. Or, call the FDIC at 877-ASK-FDIC (877-275-3342) and ask to speak with a deposit insurance specialist. They will be happy to let you know whether your bank provides the coverage you need. 

If your financial institution fails and it is FDIC insured, there is no reason to panic. Since January 1, 1934, the first day FDIC insurance was in effect, no depositor has lost a single penny of insured funds due to bank failure. That's a pretty impressive track record and a good reason to make sure your bank is FDIC insured.

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