It pays to know how the FDIC insures your deposits

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A checking or savings account is the place for money that you can’t afford to lose.

While the annual percentage yield (APY) is very important for these funds, it shouldn’t be prioritized over safety. Funds that should be in a checking or savings account should be kept at a Federal Deposit Insurance Corp. (FDIC) member bank or at a federally insured National Credit Union Administration (NCUA) institution.

Last week, bank accounts and insurance made headlines when Robinhood unveiled a 3 percent yielding “Checking & Savings” account insured by neither the FDIC nor the NCUA – and was advertised as being insured by the Securities Investor Protection Corporation (SIPC). This led Stephen Harbeck, CEO of the SIPC, to point out that the SIPC “does not protect checking and savings accounts since the money has not been deposited for a protected purpose.” Late on Dec. 14, the “Checking & Savings” account was removed from Robinhood’s website and replaced with “Cash management.”

Yes, 3 percent is more than other banks are currently offering – but it’s not worth the possibility of losing principal if, for example, Robinhood went out of business. Currently, there are a number of member FDIC banks offering more than 2.25 percent APY.

What is the FDIC?

The Federal Deposit Insurance Corp., or FDIC, has been insuring bank deposits since it was established in 1933. The FDIC insures checking, savings and money market accounts, and certificates of deposit, or CDs, for up to $250,000.

It also insures individual retirement accounts, or IRAs, and trust accounts. All state and nationally chartered banks must carry FDIC insurance.

But not every account at a particular bank is covered for that amount. The way you structure your accounts could put you at risk. 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, compliance executive at Ally Bank. “People think it’s $250,000, period.”

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.

Why the FDIC was established

On June 16, 1933, President Franklin D. Roosevelt signed the Banking Act of 1933 (Glass-Steagall Act), which established the FDIC and put in place other banking reforms. The FDIC was created in the early years of the Great Depression after thousands of banks failed, resulting in about $1.3 billion in losses to depositors.

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

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.

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 raise your coverage limits higher by opening other types of accounts at 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.

How depositors can stay informed

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, (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.

FDIC insures only failed banks

FDIC insurance applies only if your bank fails. Eight banks were shuttered in 2017. That’s a big improvement from the aftermath of the Great Recession. From 2008 to 2012, the FDIC reported 465 bank failures, the largest being Washington Mutual, which had $307 billion in assets.

When a bank fails, the FDIC must collect and sell the assets of the failed bank and settle its debts. When a bank goes bust, the FDIC notifies each depositor in writing. The FDIC’s goal is to make deposit insurance payments within two business days of the failure of the insured institution.

Banks cover you in case of fraud, theft

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,” says LaJuan Williams-Young, a spokeswoman for the FDIC.

Instead, it’s the banks that are covering your losses if someone steals your money. Banks can buy insurance to protect against losses from fraud, and also have reserves to cover such losses.

If you suffer a loss due to fraud, report it to your bank as soon as possible so it can be investigated. By law, banks have to give customers provisional credit.

It’s always recommended to monitor your credit. You can monitor your credit for free on Bankrate.