How FDIC Insurance Works and What It Covers
Protecting Your Savings From Bank Failures
The Federal Deposit Insurance Corporation (FDIC) is an independent government agency in charge of banking and consumer safety. You're protected from losses if your FDIC-insured bank goes belly-up, assuming your funds are in qualifying accounts and fall below the maximum protected dollar limit.
How Safe Is Safe?
Although banks are a safe place for your money, they do lend your money out and invest it to earn a profit. If these investments go sour, what happens to your money? When your account is FDIC insured, you are generally protected from any losses.
However, FDIC coverage has limits. Certain types of accounts are not insured, and you're only covered up to $250,000 per depositor per bank. You can get more coverage than that at a single bank depending on a number of factors, including how your accounts are titled.
If you (and any household members) have accounts under multiple registrations, you might get more than $250,000 of coverage at a single bank. Adding trust accounts or retirement accounts may expand your coverage, but verify the details before you exceed $250,000.
History of the FDIC
The FDIC was established by the Banking Act of 1933 during the Franklin D. Roosevelt administration. Leading up to that, thousands of banks collapsed, and account holders lost a significant amount of money in bank failures during the Great Depression.
FDIC insurance is backed by the full faith and credit of the U.S. government. Banks replenish the FDIC's funds by paying premiums. As of 2021, nobody has lost any FDIC-insured money in a bank failure.
Protection to Accounts
When your funds are FDIC insured, you don’t need to make a run on the bank or try to pull your insured funds out before the bank goes under. However, you will want to have liquid funds available elsewhere if the cleanup takes more than a day or so. When you have uninsured funds in a bank (because you deposited more than the $250,000 per individual depositor maximum amount), you're taking a risk.
To be sure you’re covered, find out if your bank is FDIC insured. Most are, but it's always worth checking.
Credit unions are not covered by FDIC insurance. Instead, they receive very similar government-backed protection under the National Credit Union Share Insurance Fund (NCUSIF).
What's Covered or Not Covered?
FDIC insurance only applies to deposits at covered banks, including deposited funds in the following:
- Checking accounts
- Savings accounts
- Certificates of deposit (CDs)
- Money market accounts
FDIC insurance does not cover the following:
- Contents of safety deposit boxes
- Investments in stocks, bonds, or Treasury securities such as T-notes
- Investments in exchange-traded funds (ETFs) or money market mutual funds
- Insurance products, such as annuities
These items aren't covered because they aren't considered deposits—even though you might buy them through your bank.
Does FDIC Insurance Cover Fraud or Theft?
FDIC insurance also doesn't cover theft whether due to fraud, identity theft, or a bank robbery.
However, banks usually have a banker's blanket bond insuring them from losses due to robbery, fire, flood, embezzlement, and other events that may cause money to vanish.
Plus, federal law protects you from most fraud and errors in your accounts, but you have to act quickly to get full protection.
FDIC insurance is not unlimited. By having too much money in one bank or one account, you may be putting yourself at risk. The $250,000 limit is separate for each bank where you have an account. So, you can increase the FDIC insurance coverage available to you by using multiple banks, or by structuring your accounts properly within a single bank.
To get more than $250,000 of coverage at one bank, spread the money out among various owners or registrations. As an example, money in your individual taxable account is separate from money in your individual retirement account (IRA). The best way to verify that your assets are comfortably under the maximum coverage limits is the FDIC's Electronic Deposit Insurance Estimator (EDIE) tool.
For instance, what if you have $250,000 in your individual account and $250,000 in your IRA at the same bank? While it might appear that you’re over the $250,000 limit, you may be fully covered because of how your accounts are titled. Be careful about pushing the limit, though. If you receive any interest payments that send you over $250,000, those earnings may be at risk.
How to Maximize Coverage
If you have enough money at your bank to put you at risk, then it’s worth spending the time to protect yourself or have someone else do it for you. To maximize your FDIC coverage, use one or more strategies to spread your money among different banks and different account holders.
The Certificate of Deposit Account Registry Service (CDARS)
CDARS is a network of banks that allows you to spread your money around. You open an account with one bank (possibly the same bank you already use), and if the bank participates in CDARS, your excess funds go to other FDIC-insured banks. You’ll stay below coverage limits at each bank, and you’ll see your assets on one statement. Ask your bank if CDARS is an option.
Brokered certificates of deposit are offered by financial intermediaries such as financial advisers. By buying FDIC-insured CDs from multiple banks in your brokerage account, you can stay below coverage limits.
As mentioned earlier, you can move your excess funds to another FDIC-insured bank and have a $250,000 account at two or more banks. You can also change how your accounts are named or titled. If you exceed the coverage limits at your bank, think about titling an account in the name of each family member, using trusts, or creating a joint account with two or more people.
Changing the account titling also means a change of ownership of the funds. This change could have significant tax consequences for you and the named person. Also, it can put you at risk of losing your assets if the circumstances of the other account holder change.
Speak with an attorney, an accountant, and any affected family members before you start making account ownership changes.
Moving funds to a trust account can also increase your total limit at one bank, particularly if the trust has multiple beneficiaries. For example, you might consider establishing a revocable trust, which would allow you to be insured for up to $250,000 for each beneficiary, up to five. Coverage is available for more than five beneficiaries as well, subject to certain rules and limitations.
Mergers and FDIC Coverage
Pay attention to news about bank mergers and rescues of failing banks—especially your banks. What happens if you hold accounts at Bank A and Bank B, and the two banks merge? If there's a bank failure handled by the FDIC, insurance coverage will often treat your deposits as if they were at separate institutions for a short period. Before that period ends, though, you may want to move assets elsewhere to stay under the coverage limits.
Getting Your Money After a Failure
If your FDIC-insured bank folds, the FDIC typically gets involved and attempts to sell your bank's loan and deposit accounts to a financially sound or stable bank. If the sale goes through, your account will be moved to the buying bank. If the sale doesn't happen, the FDIC may send you a check for the insured portion of your qualifying accounts. If the FDIC needs further input from you, you'll receive correspondence in the mail.
In most cases, bank failures are brief and uneventful for customers. Your checks don’t bounce, you can go to the ATM and use your debit card without interruption, and your bills continue to get paid electronically. You might have to wait a few days or weeks to withdraw money, but it’s rare to have any meaningful wait.