Dear Dr. Don,
Does insurance from the Federal Deposit Insurance Corp. cover the accrued interest on a CD (as well as the principal) if the CD plus interest is less than $100,000?
— Jeff Justice
The FDIC’s publication “Your insured deposits” explains: “FDIC deposit insurance covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank’s closing.”
After the bank closes, the account’s ability to continue to earn interest depends on the disposition of the account. Another FDIC publication, “When a bank fails — facts for depositors, creditors and borrowers,” explains what happens:
How does a bank closing affect interest accruing on my deposits?
The FDIC’s insurance coverage includes principal and interest through the date of the bank failure up to the applicable insurance limit for each deposit. The accrual of interest ceases on all accounts once the bank is closed. If an open bank acquires deposits from the failed bank, the acquiring bank becomes responsible for re-establishing interest rates and beginning the accrual of interest after the date of the failure of the bank. The acquiring bank may change the interest rate on the acquired deposits, but the depositor may withdraw their insured funds without penalty if they chose to do so. If no acquiring bank is found for the deposits and the FDIC pays the depositors directly for their insured amounts, interest does not accrue past the date of failure.
So, you get to choose what you do with your account after a bank closing if the failed bank is acquired by another institution.
However, if there is no acquiring bank, you’ll simply get a check for your insured deposits, plus accrued interest up to the limits of deposit insurance. This was the case with IndyMac Bank, which failed in July.