How FDIC Insurance Works and What's Covered
What is FDIC insurance?
FDIC insurance protects you from losses if your bank goes belly-up (assuming your money is in an FDIC-insured bank, and your savings are below the maximum limits).
You might think of the bank as a very safe place for your money – and that is true – but banks lend your money out and invest it to earn money. If those investments go sour (which was a major risk during the mortgage crisis), what happens to your money?
If your account is fully insured, you're in pretty good shape. The FDIC will make you whole by replacing funds or sending money to you. However, there are limits on FDIC coverage: certain types of accounts are not insured, and you can only cover up to $250,000 per “depositor” per bank. $250,000 is more than enough for most of us, but you can get additional coverage at a single bank depending on how your accounts are titled.
FDIC stands for The Federal Deposit Insurance Corporation a government agency in charge of banking and consumer safety. FDIC insurance is backed by the full faith and credit of the US government (although there is some debate that this is only an implicit guarantee). In other words, the US Treasury could act as a backstop if the FDIC was unable to replace your insured funds.
Fortunately, the US Treasury has not had to fund FDIC insurance – the banks themselves replenish the insurance fund by paying premiums into the fund.
So far, nobody has lost any FDIC insured money in a bank failure.
If your bank fails, the FDIC will get involved, often facilitating a takeover by a stronger bank. 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 even weeks) to withdraw money, but it’s rare to have to wait at all.
Because of FDIC insurance, 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 two. Also, if you have uninsured funds in the bank (because you have more than the maximum amount), you are taking a risk.
To be sure you’re covered, find out if your bank is FDIC insured (most are, but it's worth checking).
What is Covered (What’s Not Covered)
FDIC insurance applies to deposits at covered banks, including:
- Checking accounts
- Savings accounts
- Certificates of deposit (CDs)
- Money market accounts (but not money market funds)
FDIC insurance does not cover:
- Safety deposit box contents
- Investments such as mutual funds, stocks, bonds, and others
- Insurance products including (but not limited to) annuities
The items above are not considered deposits – even though you may have bought them from a bank employee (or while you were physically at the bank).
FDIC insurance does not cover theft, whether due to fraud in your account, identity theft, or bank robbery. However, most banks insure against robbery (and they don’t lose much anyway). 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. If you have too much money in the bank you may be leaving yourself exposed. The basic FDIC coverage is good for up to $250,000 per depositor per bank. If you have more than that in a failed bank, the FDIC might choose to cover your losses, but there is no promise to do so.
These limits are separate for each bank that you have accounts at. In other words, 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." For example, money in your individual taxable account is separate from money in your individual retirement account (IRA). To figure out if your assets are comfortably under the maximum coverage limits, use the Electronic Deposit Insurance Estimator (EDIE) tool.
For example, what if you have $250,000 in your individual account and $250,000 in your individual retirement account (IRA) in the same bank? While it might appear that you’re over the $250,000 limit, you are fully covered because of how your accounts are titled (although you’re pushing it – if you get any interest payments into those accounts you’ll go over the limit and your interest earnings will be at risk). Trust accounts can also increase your total limit within one bank.
To increase your coverage, use strategies to spread your money among different banks and different registrations. If you have enough money that you’re at risk, then it’s worth spending the time to protect yourself or having somebody do it for you.
Three strategies include:
- CDARS is a network of banks that allows you to spread your money around. You’ll open an account with one bank (possibly the same bank you already use), and, if the bank participates in CDARS, your 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 CDs are offered by a financial intermediary (such as a financial advisor). By buying FDIC insured CDs from multiple banks in your brokerage account, you can stay below coverage limits.
- Titling accounts: if you’ll go above the coverage limits at any given bank, consider changing the title or registration of your accounts. This also means a change of ownership – which could have significant tax consequences (and put you at risk of losing your assets if something happens to or with another account holder) – so speak with an attorney, an accountant, and any affected family members before you start making changes.
Mergers and FDIC Coverage
Pay attention to news about bank mergers and rescues of failing banks. What happens if you hold accounts at Bank A and Bank B, and the two banks merge? If there is 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. After that period, you may want to move assets elsewhere to stay under the coverage limits.