When you open a bank account, you expect the money you deposit to be safe. These accounts don't work as a personal vault, which means your money doesn't just sit around waiting for you to make a withdrawal when you need access to it. Banks operate under a fractional system, which means they keep a certain amount of cash on hand—usually 10%. The remaining 90% is reserved to loan out to others.
When banks can't keep up with the demand for withdrawals, they may have to turn people away. When more want their money and can't get it, they end up losing confidence, resulting in panic. This, in turn, can trigger a domino effect, leading to a failure in the banking system, which the United States experienced during the Great Depression.
In order to keep public confidence, the federal government created the Federal Deposit Insurance Corporation (FDIC) in 1933. This short article outlines the basics of FDIC insurance, along with what's covered and what isn't covered.
- The Federal Deposit Insurance Corporation protects consumers against loss if their bank or thrift institution fails.
- Not all institutions are insured by the FDIC.
- Eligible bank accounts are insured up to $250,000 for principal and interest.
- The FDIC does not insure share accounts at credit unions.
What Does it Mean to Be FDIC Insured?
The FDIC is an independent agency of the U.S. government that protects you against loss of deposit if your bank or thrift institution fails and is FDIC insured. So, if you have money in an FDIC-insured bank account and the bank fails, the agency reimburses you for any losses you incur.
Many banks use the fact that they're insured as a selling feature even though it isn't a mandate. In other words, an uninsured bank cannot compete effectively in an industry where consumers expect their money to be protected. To see if your bank is FDIC insured, check out the FDIC Bank Find page.
What Is Covered?
The FDIC does not insure all accounts. Insured accounts include negotiable orders of withdrawal (NOW), money market deposit accounts (MMDA), checking and savings accounts, and certificates of deposit (CD). FDIC insurance covers the principal and interest of an account, not exceeding the $250,000 limit. For a list of the types of accounts and how they are covered, see the chart below:
|What and How Much Is Covered?|
|Single Account||$250,000 per owner|
|Certain Retirement Account||$250,000 per owner|
|Joint Account||$250,000 per co-owner|
|Revocable Trust||Owner is insured $250,000 per beneficiary|
|Irrevocable Trust||$250,000 for the trust; additional coverage is available under specific conditions.|
|Employee Benefit Plan||$250,000 for the noncontingent interest of participants|
|Corporation, Partnership, or Unincorporated Association Account||$250,000 per entity|
|Government Account||$250,000 per custodian|
If you have a savings account with a balance of $50,000 and a CD with a $150,000, both accounts are insured as they fall under $250,000. If you and your spouse have a joint account with a $500,000 balance and $200,000 in another eligible account, both accounts are covered as their combined falls under the $250,000 per person rule.
What Isn't Covered
The FDIC doesn't cover all types of accounts. Financial instruments, such as stocks, bonds, money market funds, U.S. Treasury securities (T-bills), safe deposit boxes, annuities, and insurance products are not insured by the FDIC.
The FDIC does not insure stocks, bonds, money market funds, U.S. Treasury securities, safe deposit boxes, annuities, and insurance products.
The FDIC does not insure regular shares and share draft accounts of credit unions. Similar to the FDIC, the National Credit Union Share Insurance Fund, administered by the National Credit Union Administration (NCUA), insures accounts at credit unions.
The Advisor Insight
Jeff Rose, CFP®
Alliance Wealth Management, Carbondale, IL
In general, nearly all banks carry FDIC insurance for their depositors. However, there are two limitations to that coverage. The first is that only depository accounts, such as checking, savings, bank money market accounts, and CDs are covered.
The second is that FDIC insurance is limited to $250,000 per depositor, per bank. That means if you have $500,000 sitting in one bank, only half of the money is insured.
The way to get around this limitation is to spread your money across more than one bank. If you have $500,000 held in a bank account, you can put $250,000 in one bank and $250,000 in another one. But coverage is not segregated by branches within the same banking institution, so just remember that both banks need to be completely unrelated.