What Is FDIC Insurance?

What Is FDIC Insurance? article image.

Offered by the Federal Deposit Insurance Corporation (FDIC), deposit insurance protects you if the financial institution you're banking with fails. You don't need to apply for coverage, as deposit insurance automatically goes into effect when you open an account that's covered by FDIC insurance.

What Is Covered by FDIC Insurance?

FDIC Insurance covers deposit accounts, including checking and savings accounts, money market deposit accounts, negotiable order of withdrawal (NOW) accounts, certificates of deposits (CDs), cashier's checks, money orders, and select prepaid cards from FDIC-backed banks. Use this tool from the FDIC to determine if your banking institution is insured.

FDIC Deposit Insurance Coverage Limits

FDIC insurance provides coverage of up to $250,000 per depositor, per insured bank account. The coverage amount is determined by the FDIC ownership category, which is the way deposits are held at your financial institution. Ownership categories include:

  • Single account: A checking, savings or money market account without a named beneficiary. These accounts have an FDIC deposit insurance coverage limit of $250,000 per owner.
  • Joint account: An account owned by two or more depositors that does not have named beneficiaries. FDIC insurance coverage is available for up to $250,000 per co-owner.
  • Select retirement accounts: This includes individual retirement accounts (IRAs), 401(k)s, profit-sharing plans, self-directed Keogh plan accounts and Section 457 deferred compensation plan accounts. Qualifying retirement account deposits are covered up to $250,000 per owner.
  • Revocable trust account: A formal living trust or informal "in trust for" (ITF)/payable on death (POD) account with one or more beneficiaries. FDIC insurance coverage of up to $250,000 is available per owner, per unique beneficiary.
  • Irrevocable trust account: Funds that are tied to an irrevocable trust from a written agreement or statute. The noncontingent interest of each unique beneficiary qualifies for FDIC deposit insurance coverage of up to $250,000.
  • Employee benefit plan account: A deposit from a non-self-directed pension, defined benefit or other employee plan. The FDIC provides insurance of up to $250,000 for the noncontingent interest of each plan participant.
  • Government accounts: Deposit accounts owned by federal agencies, states, counties, municipalities, the District of Columbia, Puerto Rico and Indian tribes. FDIC deposit insurance coverage for these accounts is limited to $250,000 per official custodian.
  • Partnership, corporation or unincorporated association accounts: FDIC insurance covers up to $250,000 in deposits per partnership, corporation or unincorporated association.

The FDIC does not cover investments, such as stocks, bonds, Treasury bills or mutual funds, even if they are purchased through or held with an FDIC-insured financial institution.

What Happens When a Bank Fails

When an FDIC-backed bank fails, the FDIC works diligently to sell it to another financial institution promptly through a purchase and assumption transaction. If their efforts are unsuccessful, the FDIC disburses funds (up to the insured limit) to depositors directly through a deposit payoff.

It could take up to two business days to receive your funds, unless accounts are linked to trust agreements or fiduciaries. In this case, it could take longer for insurance payments to be sent to you, as additional documents may be needed to release funds.

Below are some other important considerations to keep in mind when a bank fails:

  • Unused checks and deposit slips: You can continue to use checks and deposit slips for your account if your bank is acquired.
  • Interest earned on deposits: Interest will no longer accrue on deposits if your bank closes. The accrual of deposits will resume if a new bank takes over, but at the new interest rate they set.
  • Direct deposits: Funds are deposited as usual if your bank is acquired by another bank. Otherwise, the FDIC will reroute direct deposits to a different bank temporarily so depositors will have access to their funds.
  • Pending checks and payments: These are typically processed without a hitch if your bank is acquired. If not, the checks will not clear and payments will be returned. The returned transactions will not directly hurt your banking or credit profile, but you'll need to make other arrangements to remit payment right away to make sure it's considered on time.
  • Safety deposit boxes: You can continue to access your safety deposit box if a healthy bank takes over. Otherwise, you will receive a letter from the FDIC that details how to access the contents of your safety deposit box.

If you do have over $250,000 in a single FDIC-backed account, your funds may not be at risk if they are held in separate ownership categories. For example, you could have $250,000 in a single account and another $250,000 in a joint account at the same bank.

Another option to protect your hard-earned money is to have accounts at more than one bank. Let's say you have $1 million and open four money market accounts at four different FDIC-backed banks with deposits of $250,000 each. Your funds won't be at risk of loss. However, if you put the entire amount into the same type of account at a single FDIC-backed bank, $750,000 would not be insured.

The Importance of FDIC Insurance

FDIC insurance is a valuable benefit available to consumers. It insures your deposits in FDIC-backed financial institutions by up to $250,000, so you can have peace of mind knowing your money is safe in the event your bank fails.

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