If you have a bank account or have been looking at opening one, you’ve undoubtedly come across something called FDIC insurance.
FDIC insurance is something that financial institutions, typically banks, offer that reduces most of the risk of holding money in a bank account. That’s why it’s essential to know what it is and how it can protect your money.
There is a lot to know about FDIC insurance. Understanding how it works can help you make the most out of your deposit accounts and ensure that your money is covered.
In this article, we cover everything there is to know about FDIC insurance, including its limits, how limits are applied, and how coverage works.
What Is FDIC Insurance?
Before we start to look into what FDIC insurance is, it is well worth first taking a look at FDIC itself. Starting here can better help us understand who is providing the insurance and what it all means.
FDIC is an acronym that stands for Federal Deposit Insurance Corporation.
This corporation is, in fact, an agency that the US government owns. It was set up in 1934 to protect those who deposit money in a US Bank.
The FDIC protects depositors through the FDIC insurance. This insurance is there to make good on the money held in an insured account should the bank offering the deposit products fail.
The insurance is offered on different types of deposit accounts, with comprehensive coverage should there be a bank failure.
If a bank fails and cannot give you your money back, the FDIC will step in and give you your money up to the coverage limit.
What Is The FDIC Insurance Limit?
The deposit insurance coverage provided by the FDIC is not unlimited. You’re insured up to $250,000 on all eligible accounts combined per ownership category held at an FDIC-insured bank.
Banks’ FDIC insurance covers all of your deposits at a given bank up to $250,000.
What it means is that it’s not the account itself that is insured, but rather, the insurance covers you for all of the deposits in eligible accounts held at an insured bank.
FDIC Insurance Limit Example
Let’s use an example to clarify this.
You go to Bank A, and you open a savings account and deposit $200,000 and a checking account with $60,000. The combined deposits held at Bank A equal $260,000.
Since you’re insured up to $250,000 on eligible deposits combined, $10,000 of the $260,000 you have at Bank A are not insured.
Now, let’s suppose that you go to Bank B and take half of your savings ($100,000) and half of your checking ($30,000) with you, which you deposit in a new savings account and a new checking account held with Bank B.
Now the entire $260,000 is covered since you have $130,000 at each bank.
You can't just go to a different branch of the same bank. To get additional coverage, you need to go to a separate bank altogether – while, of course, making sure that the second bank is also FDIC insured.
The coverage amount covers both the principal as well as any interest you have in your accounts. To understand if you are fully covered, add up the money you hold in your eligible accounts under each ownership category at any one bank.
If the amount is under $250,00, you can consider yourself fully covered. If you have more than $250,000, the amount that goes over $250,000 is not insured.
One question that comes up here is what happens when there is a joint account? Excellent question.
For joint accounts, the FDIC assumes each of the depositors owns equal parts of the joint account, and each depositor has the same $250,000 limit.
This means that a savings account jointly held by a husband and wife, for example, is fully insured up to a total of $500,000.
Understanding the limits can get more tricky as additional owners are added with varying interests.
FDIC Insured Accounts
FDIC insurance covers a wide range of different bank accounts and types of checking accounts. The insurance also covers different ownership categories.
While this may sound complicated, in reality, it is not. Understanding what is covered is important.
Knowing this will allow you to make sure that you distribute your funds to ensure maximum coverage.
FDIC Insurance Covers the Following Types of Accounts:
- Checking Accounts
- Savings Accounts
- Money Market Accounts/ Money Market Deposit Accounts (MMAs/MMDAs)
- Certificates of Deposits (CDs)
- Negotiable Order of Withdrawal Accounts (NOW)
The FDIC also Insures Official Bank Items, including:
- Cashier’s Checks
- Money Orders
Now that we’ve looked at the types of covered accounts, we’ll look at FDIC insurance ownership requirements.
FDIC Insurance Ownership Requirements:
- Formal Revocable Trust Accounts (Living Trusts, Family Trusts) and Informal Revocable Trust Accounts (Payable on Death, In Trust For)
- Irrevocable Trusts
- IRAs (Individual Retirement Accounts)
- Employee Benefit Plans
- Business bank accounts
- Government accounts
- Corporation/ Unincorporated Association Accounts
It’s good to know what these categories are since the FDIC insures each depositor per account category.
With this method, you are insured up to $250,000 for all accounts under each ownership category separately.
Thus, a savings account you hold under your name is insured separately from a CD account you hold as an IRA.
In this case, each account is insured up to $250,000 since they belong to different ownership categories.
When it comes to accounts and ownership, several terms and conditions apply. In most cases, you will be fine, and there’s no need to worry.
If your financial situation is complicated, you might want to refer to the FDIC’s guidelines or a financial advisor to guide you through the FDIC’s rules.
What FDIC Insurance Doesn’t Cover
FDIC insurance does not cover all types of accounts. While, as we saw earlier, most bank accounts are insured, accounts that carry higher risks are not insured.
The FDIC Doesn’t Cover the Following Yypes of Accounts and Investments:
- Investments in stocks
- Investments in bonds
- Mutual funds
- Life insurance policies
- Municipal securities
- Safe deposit boxes (including any content stored within)
- US Treasury bonds, bills, and notes
You’ll notice that the accounts not covered by the FDIC are not bank accounts but are mostly brokerage accounts.
These accounts are primarily held as investments rather than hold deposits and represent significant financial risk. The US government backs bonds, bills, and notes issued by the US Treasury.
How To Get FDIC Insurance
Getting FDIC insurance is easy; in fact, you don’t need to do anything except for selecting an FDIC-insured bank when it comes to depositing your money.
Any money you deposit in an eligible account at a bank insured by the FDIC is insured automatically. So, you can put your mind at rest that your money is secure – and it won’t disappear just like that.
In the unlikely event that your bank fails, the FDIC will kick off a process to ensure that you get access to your money as quickly as possible.
The FDIC will take the first step to try and find another bank to buy the failed bank. If successful, the new bank will assume responsibility for your accounts and the money.
Should the FDIC not find a bank willing to take over the failed bank’s operations, it will take it over itself and send you a check to cover your insured deposits. Here, the FDIC tries to be as efficient as possible, which means that you can expect to receive your check within a few days from the bank’s closing, which held your account.
One other scenario worth knowing about is what happens in the case of a merger or acquisition. As we now know, the FDIC insures deposits at different bank accounts separately.
That can create problems if you have accounts at the two banks that are now merging since your insurance amount will nearly halve.
In this scenario, the FDIC will continue insuring your bank deposits separately for up to 6 months. During these six months, you’ll need to reallocate your insured deposits to make sure nothing is left uninsured.
FDIC Insurance FAQs
Are joint accounts FDIC insured to $500,000?
FDIC deposit insurance coverage covers each depositor up to $250,000. The latter applies to deposits held in joint accounts as well as single accounts.
If a joint account has two owners, each co-owner is insured up to $250,000, which means the joint account is technically insured up to $500,000.
Since the insurance limit of $250,000 is per account holder per ownership category, any money saved in the single ownership category does not affect the joint account’s insurance limit.
Should either account holder hold any other accounts that fall within the joint bank account category, then the $250,000 limit is spread over those accounts as well.
How much deposit is insured by FDIC?
The FDIC insures each depositor up to $250,000. This limit applies to all deposits combined held in eligible accounts under every ownership category at a particular bank.
Throughout the article, we covered all account types and ownership categories, helping you work out your coverage. You can also use the FDIC’s coverage calculator, which enables you to understand what is covered and not.
What is the FDIC limit for 2021?
The FDIC insurance limit for 2021 is $250,000 per depositor per ownership account category for accounts held with an insured bank.
Does FDIC insurance cover each account?
While the FDIC insurance covers most accounts, it does not cover every account.
Most commonly used bank accounts, such as savings, checking, retirement accounts, and trust accounts, are all insured up to the coverage limit.
What are some FDIC-insured banks?
It is safe to say that the FDIC insures most banks – and this is certainly true of high-street banks.
Online banks tend not to be insured themselves but operate through a traditional bank that gives them insurance on their deposit accounts.
If you’re not sure if your bank is insured, you can use FDIC’s BankFind feature, which lists all banks that are insured.
It is important to note that the FDIC does not insure credit unions. They have their own insurance called NCUA insurance which the National Credit Union Administration provides.
Money held in a bank account is one of the safest ways to a bright financial future.
While there are many things to look out for, such as high-interest rates and low fees, FDIC insurance is perhaps the most important of all.
That’s because it protects you from the worst-case scenario, however unlikely that is – a bank’s failure.
FDIC insurance doesn’t have unlimited coverage, however. That’s why it’s so important to understand what is covered and how.
Knowing this allows you to make sure that you distribute your bank accounts accordingly, maximizing your coverage and keeping your deposits as safe as possible.
While the terms and conditions can get a bit bust, the FDIC offers several resources to help you stay on top of it all. From the bank finder to the insurance estimator, making the most out of FDIC’s insurance is easy and well worth the time.