Bank Rating: What They Mean, Overview and Examples

What Is Bank Insurance?

Bank insurance is a guarantee by the Federal Deposit Insurance Corporation (FDIC) of deposits in a bank. Created in 1989, the Bank Insurance Fund is the federal fund used to insure bank deposits of national and state banks that are members of the federal reserve system. Bank insurance helps protect individuals who deposit their savings in banks against commercial bank insolvency. Each depositor is insured to at least $250,000 per bank.

Understanding Bank Insurance

The FDIC, an independent U.S. government corporation, was initiated under the Glass-Steagall Act of 1933. Its purpose was to insure bank deposits against loss and to regulate banking practices. The collapse of a great majority of banks in the United States during the Great Depression prompted the creation of the FDIC. 

FDIC deposit insurance coverage depends on two things: whether your chosen financial product is a deposit product and whether your bank is FDIC-insured. If your insured bank fails, FDIC insurance will cover your deposit accounts, dollar for dollar up to the insurance limit, including principal and any accrued interest through the date of the insured bank’s closing. 

FDIC coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution. If you want FDIC deposit insurance coverage, all you have to do is place your funds in a deposit product at the bank. 

Generally, a bank fails if it is unable to meet its obligations to depositors and others. If a bank fails, the FDIC responds in two capacities. First, as the insurer of the bank's deposits, the FDIC pays insurance to the depositors up to the insurance limit. Second, the FDIC, as the "receiver" of the failed bank, assumes the task of selling/collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit.

FDIC Bank Insurance Coverage Includes

  • Checking accounts
  • Negotiable Order of Withdrawal (NOW) accounts
  • Savings accounts
  • Money market deposit accounts (MMDAs)
  • Time deposits such as certificates of deposit (CDs)
  • Cashier's checks, money orders, and other official items issued by a bank

FDIC Bank Insurance Coverage Does Not Include

  • Stock investments
  • Bond investments
  • Mutual funds
  • Life insurance policies
  • Annuities
  • Municipal securities
  • Safe deposit boxes or their contents
  • U.S. Treasury bills, bonds, or notes

Example of How FDIC Bank Insurance Limits Works

The limits of FDIC insurance is one of the most misunderstood forms of financial guarantee in the US, even amongst banking personnel. the short answer is always "FDIC insurance is limited to $250,000 per person, but this is not accurate.

Each person can avail themselves of $250,000 of insurance per banking category, as outlined by the FDIC. Those categories include individual accounts, joint accounts, assets held for others in pay on death accounts, certain types of retirement savings accounts, and several others. A single person, with assets spread over a number of qualified accounts, could theoretically have $500,000, $750,000, or even $1 million insured in bank deposits.