FDIC insurance: What it is and how it works
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With the failure of another large bank — First Republic Bank — it might be a good time to review your deposits’ insurance. If you have money at a bank, most likely it’s protected by federal insurance, up to a limit.
Here’s everything you need to know about how your money is backed by the government and what the limits are.
What is FDIC insurance?
The Federal Deposit Insurance Corp. (FDIC) is the agency that insures deposits at member banks in case of a bank failure. FDIC insurance is backed by the full faith and credit of the U.S. government.
The FDIC insures up to $250,000 per depositor, per FDIC-insured bank, per ownership category. This guarantees consumers that their money is safe, as long as it’s within the limits and guidelines.
Why the FDIC was created
The FDIC was created in 1933 to protect consumers when financial institutions fail and are forced to close their doors.
During the Great Depression, insurance for banks was not available. So when banks failed, Americans lost their savings. Now when banks fail, the FDIC steps in to protect depositors and their money.
“Bank failures are unusual,” says Mark Hamrick, Bankrate’s senior economic analyst and Washington bureau chief. “But when they happen, affecting covered institutions, FDIC coverage is important.”
Having that insurance is a crucial backstop to financial uncertainty. Following a wave of bank collapses, including those of Silicon Valley Bank and First Republic Bank, consumers can ensure that all of their deposits within the insurance guidelines are guaranteed by the government, and they don’t have to worry about withdrawing their money from the bank.
Which institutions are covered by FDIC insurance?
The vast majority of banks, including online banks, offer deposit customers FDIC insurance.
An online bank that’s FDIC-insured has the same FDIC coverage as a brick-and-mortar bank. If you open an account with an FDIC-insured bank, you are automatically enrolled in the federal insurance.
You can confirm that your bank is FDIC insured by using the FDIC’s BankFind Suite.
It is rare for a bank not to have FDIC insurance, but there are exceptions. Bank of North Dakota, for example, is not FDIC-insured. Instead, it is backed by the full faith and credit of the State of North Dakota.
Credit unions are regulated differently from banks and have their own federal deposit insurance through the National Credit Union Share Insurance Fund (NCUSIF). The fund was created by Congress in 1970 to insure deposits in member credit unions.
It’s administered by the National Credit Union Administration (NCUA), which charters, regulates and monitors federal credit unions. The insurance is similar to what the FDIC provides, with a $250,000 cap for each account and owner.
FDIC insurance: What’s covered and what isn’t
What FDIC insurance covers
FDIC insurance covers traditional bank deposit products, including checking accounts, savings accounts, certificates of deposit, Negotiable Order of Withdrawal (NOW) accounts and money market deposit accounts.
The FDIC classifies deposit accounts into several ownership categories, including single accounts, joint accounts, corporate accounts, and retirement accounts. Individual depositors are insured up to $250,000 per each ownership category, per FDIC-insured bank. If an account holder has more than $250,000 in accounts that fall under a single ownership category at one bank, anything over that amount is not insured.
An individual account is insured separately from a joint account, since they are distinct ownership categories. Joint accounts are insured $250,000 per co-owner, so a $500,000 CD owned by two joint account holders would be fully insured because each account holder is insured for up to $250,000.
Likewise, accounts owned by corporations or partnerships are also considered a distinct ownership category. That means that businesses with more than $250,000 in their bank account will not get the excess amount insured, unless they split the funds between different banks, since each bank gets its own insurance limits.
If Sarah has $250,000 in a joint savings account and $200,000 in a checking account as a single owner, her money is fully insured. Even though the total deposits exceed $250,000, the money is split between different ownership categories, so each account is insured separately.
On the other hand, if Cameron has $200,000 in a high-yield savings account and $125,000 in a CD at the same bank in his name alone, $75,000 of his deposits are uninsured. To make sure his money is entirely federally insured, he could open an account at a separate FDIC-insured bank or transfer some of the money into a jointly owned account.
FDIC insurance also protects interest earnings, as long as the principal and interest combined do not exceed the $250,000 cap. If you have $248,000 in a CD account that has earned $2,000 in interest, the full amount is covered because your account does not exceed the insurance limit.
What the FDIC doesn’t cover
The FDIC does not insure investments. Even if you buy stocks, bonds, mutual funds, annuities or life insurance policies through a bank, your money is not protected. The FDIC doesn’t cover the contents of your safe-deposit box either.
Payment providers, such as PayPal and Venmo, also do not qualify for FDIC insurance because they are not banks. There are some exceptions, though. PayPal offers pass-through FDIC insurance for funds that are directly deposited to a PayPal account. Note that it isn’t PayPal itself that comes with the insurance, but rather the funds are held in a custodial account at an FDIC-insured bank that partners with PayPal.
If you’re not sure whether all your deposits are FDIC-insured, talk to a bank representative or use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) and enter information about your accounts.
How to guarantee all of your deposits are insured
Depending on your circumstances, you might be able to keep your bank deposits insured by keeping your cash in different ownership categories.
For example, joint account ownership offers more protection than single account ownership because each account owner is insured up to $250,000. So, if a couple had $500,000 in a joint savings account, their money would be insured by the FDIC. A savings account with a single owner with $500,000 would only be half insured.
Trusts also afford more protection. If you have a revocable trust, as many as five beneficiaries are insurable for up to $250,000 each.
Spreading your money around to different FDIC-insured banks is another way to maximize insurance protection. There are bank networks that can do that for you.
The table below shows how different account ownership categories can affect your deposit insurance coverage.
|DIFFERENT TYPES OF ACCOUNT OWNERSHIP||INSURED||UNINSURED|
|Account holder A (single ownership)
|Account holder B (joint ownership)
|Account holder C (revocable trust: up to 5 beneficiaries insured for up to $250,000)
Beneficiary 1: $250,000
Beneficiary 2: $250,000
Beneficiary 3: $250,000
Beneficiary 4: $250,000
Beneficiary 5: $250,000
How the FDIC pays you back after a bank fails
Depositors do not need to file insurance claims to recoup their deposits. Nor do they need to apply for deposit insurance when they open up a bank account at an FDIC-insured institution.
When a bank fails, the FDIC pays depositors by giving them an account at another insured bank in the amount equal to what they had at the failed bank, up to the insurance limits. If there is no bank to acquire the deposits, the FDIC simply issues the depositor a check within a few days.
Note that while the FDIC guarantees depositors won’t lose any money up to the covered amount, there is no guarantee that if the funds move to a new bank they will earn the same interest rate. However, depositors can always withdraw the funds after a new bank acquires them with no penalty.
It can take a few years to recover deposits that exceed the insurance limit. As the FDIC sells off a failed bank’s assets, it typically issues periodic payments to depositors. Funds that exceed insurance limits are repaid on a cents-on-the-dollar basis.
Silicon Valley Bank, for example, did not have insurance coverage for most of its deposits when it failed, according to regulatory filings. The FDIC announced it would pay back uninsured deposits in receivership certificates and dividend payments as it sells the closed bank’s assets.
Still, it’s best to make sure your deposits don’t exceed the FDIC limits, so you can readily access your insured funds as soon as the failed bank is acquired by another bank or the FDIC pays off closed accounts.
–Staff writer René Bennett contributed to this article.