Some cash and a savings deposit slip © iStock

Did you know that the amount of money in your bank account matters in the unlikely event your bank fails?

While your deposits are insured for up to $250,000 by the Federal Deposit Insurance Corp., or FDIC, that doesn’t mean every account at a particular bank is covered for that amount. The way you structure your accounts could put you at risk. But there also are ways to set up accounts so you’re insured for far more than $250,000.

“A lot of consumers don’t understand what the limits are,” says Thomas Healy, deputy chief compliance officer at Ally Bank. “People think it’s $250,000. Period.”

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What is FDIC insurance?

Since it was established in 1933, the FDIC has provided insurance on your money in case your bank goes belly up.

The insurance covers checking, savings and money market accounts, and certificates of deposit, or CDs. It also covers other types of accounts, such as individual retirement accounts, or IRAs, and trust accounts.

All state and nationally chartered banks must carry the insurance, says FDIC spokeswoman LaJuan Williams-Young.

Why the government created the FDIC

On June 16, 1933, President Franklin D. Roosevelt signed the Banking Act of 1933, which established the FDIC, among other things. The FDIC was created in response to thousands of bank failures during the early years of the Great Depression that resulted in about $1.3 billion in losses to depositors.

The act was designed “to raise the confidence of the U.S. public in the banking system by alleviating the disruptions caused by bank failures and bank runs,” according to the FDIC.

FDIC insurance doesn’t cover investment products, such as mutual funds, annuities, life insurance policies, stocks, bonds or the contents of your safe-deposit box.

If your money is on deposit at a federally chartered credit union or the vast majority of state-chartered ones, you have coverage through the National Credit Union Administration, or NCUA, which operates similarly to the FDIC.

FDIC insurance coverage limits

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Yes, you have coverage up to $250,000, but that doesn’t mean every account you have is insured for that much. Instead, coverage is based on how the accounts are owned.

Single accounts

The maximum amount of coverage for single accounts at one bank is $250,000. All single accounts at the same bank are added together. Let’s look at the example of an account holder we’ll call Mark.

Mark’s accounts

Savings $100,000
CD $150,000
Checking $50,000
Total $300,000
Amount insured $250,000
Amount uninsured $50,000

Joint accounts

Each co-owner receives $250,000 in insurance for each account, plus $250,000 in insurance for individual accounts at a bank. Let’s look at an example of married account holders we’ll call Ron and Pat.

Ron and Pat’s accounts

Joint savings $500,000
Ron’s CD $250,000
Pat’s savings $250,000
Total $1 million
Amount insured $1 million

You can boost your coverage limits higher by opening other types of accounts within the same bank. Other ownership categories include:

  • Certain retirement accounts.
  • Revocable trusts.
  • Irrevocable trusts.
  • Employee benefit plan accounts.
  • Corporation, partnership and unincorporated association accounts.
  • Government accounts.

“It’s very easy as an individual to have $1 million (insured) — if not more, in some cases — at specific institutions,” Healy says.

Consumers need to keep in mind that their accounts are still subject to FDIC limits even if they have accounts at different branches of the same bank, Healy says. But if they have accounts at two different banks, the insurance limits apply at each bank individually. They aren’t lumped together.

More on insurance coverage

The FDIC offers multiple ways for depositors to find out how to set up their accounts to maximize their protection:

  • A toll-free consumer hotline, 1 (877) ASK-FDIC or 1 (877) 275-3342, allows depositors to talk to a live person at no cost.
  • An online customer assistance form allows depositors to ask questions or submit complaints by email.
  • An automated interactive online service, the Electronic Deposit Insurance Estimator, also known as “EDIE,” helps depositors analyze whether accounts are properly set up.
  • Depositors can ask questions or submit complaints by mail to: FDIC, Attn: Deposit Insurance Outreach, 550 17th St. NW, Washington, D.C., 20429-9990.

Only bank failures are covered

FDIC insurance applies only if your bank fails. And after a few volatile years, bank failures have again become rare. Just a handful of banks have been shuttered in 2015.

That’s a huge improvement. From 2008 to 2012, the FDIC reported 465 bank failures. The largest was Washington Mutual, which had $307 billion in assets when it failed in 2008. The government blamed the failure on WaMu’s high-risk lending strategy.

When a bank fails, the FDIC must collect and sell the assets of the failed bank and settle its debts. If your bank goes bust, the FDIC will typically reimburse your insured deposits the next business day, says Williams-Young.

Banks cover you in case of fraud

It’s a different story if your bank account is hacked or someone writes a bogus check and drains your account.

“It’s only for bank failure that FDIC insurance covers the account,” Williams-Young says.

Instead, it’s the banks themselves that are covering your losses if someone steals your money, says Doug Johnson, senior vice president of payments and cybersecurity policy for the American Bankers Association, or ABA. “Banks as a matter of policy fully reimburse customers for fraud on their accounts.”

Banks can purchase insurance to protect against losses from fraud, and also have reserves to cover such losses, Johnson says.

A study by the ABA found that in 2012, fraud against deposit accounts cost banks $1.74 billion, but banks prevented $13 billion in fraud, Johnson says.

If you suffer a loss due to fraud, you should report it to your bank as soon as possible so it can be investigated. “We’re getting pretty good at doing the investigations,” he says.

By law, banks have to give customers provisional credit within 10 days. “They generally give provisional credit much sooner, or full credit,” Johnson says.

If you’re a victim of fraud, grab a free copy of your credit report at myBankrate.

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