FDIC insurance: What it is, how it works and limits

The Federal Deposit Insurance Corp. (FDIC) is a U.S. government agency that insures deposits at member banks in case of a bank failure. And while that’s not a likely event, it does happen.

Here’s what you need to know about how your money is backed by the government through the FDIC, how the insurance works, and the limits of FDIC insurance.

What is FDIC insurance?

FDIC insurance is the guarantee that your money, up to the established guidelines, is protected and will be returned to you should your bank fail. 

The FDIC was created in 1933 during the Great Depression to restore and maintain public confidence in the banking system. This came on the heels of many banks failing following the stock market crash of 1929 and people’s money vanishing along with the banks. 

Now when banks fail, the FDIC steps in to give depositors back 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.”

FDIC insurance limit

The FDIC insures up to $250,000 per depositor, per FDIC-insured bank, per ownership category (such as single or joint accounts). This means your money is safe if your FDIC-member bank fails, as long as your balances are within the limits.

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 (CDs) and money market accounts.

The FDIC classifies deposit accounts into several ownership categories. These include:

• Single accounts
• Joint accounts
• Corporate accounts
• Certain retirement accounts

So this means that an individual account is insured separately from a joint account, since they’re distinct ownership categories. If you have more than $250,000 in accounts that fall under the same ownership category at one bank, anything over that amount isn’t insured.

What the FDIC doesn’t cover

The FDIC doesn’t insure investments. Here are some items that aren’t bank deposits and aren’t covered by FDIC insurance, even if they’re in an account with a bank’s name on it or if you bought one at a bank:

• Stocks
• Bonds
• Mutual funds
• Annuities
• Life insurance policies

The FDIC also doesn’t cover the contents of your safe-deposit box either.

How to insure more than $250,000

If you have less than $250,000 at a federally insured bank, all of your money is protected. Once you exceed $250,000 at one federally insured bank, you can safeguard your money and maximize insurance protection with a little strategic organization. 

• Use multiple banks. Spreading your money between different FDIC-insured banks is one way to keep your cash protected. 
• Keep your cash in different account categories. Joint account ownership offers more protection if your federally insured bank fails than single-account ownership, because each account owner is insured for up to $250,000. So, if a couple had $500,000 in a joint savings account, all their money would be insured by the FDIC — if they didn’t have any other money in a joint account at that bank. 
• Consider a trust. A trust is a legal vehicle that enables a third party — a trustee — to hold and direct assets in a trust fund on behalf of a beneficiary. Trusts  afford more protection because as many as five beneficiaries are insurable for up to $250,000 each.

How to calculate if your funds are all FDIC insured

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 check if your bank is insured by the FDIC

To make sure your bank is insured by the FDIC before you put your money there, you can look up the bank’s name in FDIC’s BankFind Suite tool.

How the FDIC pays you back after a bank fails

Depositors don’t 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.

If your bank fails, the FDIC will pay out the insured amount by either setting up a new account at the bank that acquired the failed bank or issuing you a check within a few days — so you should have access to your money pretty quickly.

If you don’t like the new bank that acquired your account, you can always withdraw your funds and find a new bank on your own.

What happens if you had uninsured funds?

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, didn’t have insurance coverage for more than 94 percent of its total deposits as of the end of 2022, according to the Federal Reserve. The FDIC announced it would pay back uninsured deposits in receivership certificates and dividend payments as it sells the closed bank’s assets.

How FDIC insurance works at fintechs

If you’re thinking of banking with a financial technology firm, such as Cash App or Chime, you should understand that FDIC insurance works differently at those institutions than it does at chartered banks and comes with more risks.

That’s because fintechs provide what’s called pass-through FDIC insurance. They partner with FDIC-insured banks, and technically it’s the partner bank that holds your money and protects it. But the protection only kicks in if the partner bank fails, not if the neobank fails. Plus, the fintech would have to meet a few other requirements for the insurance to work, such as maintaining meticulous records. 

If a neobank fails, your money is not necessarily lost. You may be able to get it back through bankruptcy proceedings, but it will take longer than a standard bank failure the FDIC protects. And it’s not guaranteed.

FAQs about FDIC insurance

• Which institutions are covered by FDIC insurance?

  Most banks, including online-only banks, offer deposit customers FDIC insurance.

  It’s 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), which is administered by the National Credit Union Administration (NCUA). The insurance is similar to what the FDIC provides, with a $250,000 cap for each account and owner.

• Do I need deposit insurance?

  It’s best to make sure your deposits are at an FDIC-insured institution and don’t exceed the FDIC limits, so you can readily access your insured funds if your bank fails.

  FDIC insurance is not something you purchase. It’s automatic and free for any  eligible account opened at an FDIC-insured bank.

Bottom line

In the event of a bank failure, FDIC insurance provides crucial protection for consumers’ deposits. With up to $250,000 in coverage per depositor, per FDIC-insured bank, per ownership category, it’s important for individuals and businesses to understand the limits and guidelines of this insurance.

While most banks, including online-only banks, offer FDIC insurance, it’s still important to confirm this coverage and make sure all deposits fall within the insured limits. By spreading deposits across different banks or ownership categories, individuals can maximize their insurance protection. In the unlikely event of a bank failure, the FDIC will pay depositors back by transferring their funds to another insured bank or issuing a check. It’s always best to stay within the insurance limits to ensure quick and easy access to insured funds.