In personal finance, it is essential to understand how safe your money is in the bank. It is no secret that with economic uncertainties and an ever-imminent risk of bank failures, many have rightfully grown concerned about deposit safety. This is where the Federal Deposit Insurance Corporation, more commonly called the FDIC, comes in. This post will cover precisely what FDIC insurance entails, how your money is covered, and other aspects of bank safety.
What is FDIC insurance?
The FDIC is an independently established agency of the United States. It was created by Congress in 1933 in response to the colossal bank failures that characterized the Great Depression. The prime purpose of the FDIC is to maintain public confidence in the financial system by insuring deposits in member banks, regulating the management and soundness of banks, and assisting in the management and liquidation processes of failed banks.
Insurance provided by the FDIC acts as a safety net for depositors in case something as unlikely as a bank failure occurs. In case of the failure of any bank, the FDIC steps in and covers depositors’ money up to a certain limit.
How Does FDIC Insurance Work?
The FDIC insurance coverage shall extend to all types of deposit accounts in insured banks, including:
- Checking accounts
- Savings accounts
- Money market deposit accounts
- Certificates of deposit (CDs)
FDIC insurance does not, however, insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchase these investments from an FDIC-insured bank.
Limits of the FDIC Coverage: The current insurance limit from the FDIC is $250,000 for each depositor in every bank per ownership category. This means that having two accounts in the same bank- one checking account and one savings account- means your total in both categories is covered by the limit of $250,000. If deposits are kept with a single bank or more, each amount is similarly insured to an equal amount as this limit per bank.
For example:
- John has $200,000 in a checking account and $100,000 in a savings account at Bank A. That totals $300,000 deposited in the bank, insured for $250,000 by the FDIC. John’s accounts are fully insured since he is $50,000 below the insured limit.
- If John has another $250,000 in a savings account at Bank B, the FDIC fully insures that amount.
Account Types and Ownership Categories
Insurance through the FDIC covers a wide array of account types and ownership categories. Understanding the different account categories helps individuals maximize their insurance coverage.
- Single Accounts: Single accounts are accounts in only one owner’s name with no beneficiaries. Every depositor is insured up to $250,000 per bank.
- Joint Accounts: These are accounts held by two or more people. The FDIC insures each owner’s interest in the account up to $250,000.
- Retirement Accounts: As identified above, some retirement accounts, like IRAs, are also under this type of insurance, where each owner is separately covered to $250,000 per owner per bank.
- Revocable Trust Accounts: These are accounts in which the owner designates the account balances to be payable to one or more named beneficiaries upon death. A maximum of $250,000 is protected per beneficiary, provided the trust meets certain conditions.
- Corporate, Partnership, and Unincorporated Association Accounts: owned by a corporation, partnership, or unincorporated association are insured up to $250,000 per account per bank.
- Government Accounts: Accounts held by government agencies and entities are also covered; however, depending on whether some government entity holds the accounts, they are subject to different insurance limits.
How to Maximize Your FDIC Insurance Coverage
- Spread Deposits Across Banks: Because the FDIC insures money deposited for depositors at $250,000 per depositor per bank, having deposits below that threshold with several banks will automatically increase your insurance coverage.
- Different ownership categories are the name of the game here. For instance, if you have $250,000 in an individual account and $250,000 in a joint account at the same bank, each category is insured up to $250,000 separately.
- Consider a Revocable Trust: You could create a revocable trust with multiple beneficiaries to guarantee more than $250,000 at one banking institution. An increase in the number of beneficiaries increases the cumulative insured amount to $250,000 per beneficiary.
- Know Your Bank’s FDIC Status: Always make sure the bank you use is FDIC-insured. You can look it up on the FDIC’s website or check with your bank.
What Happens When a Bank Fails?
Even though bank failures are rare, when they do occur, the FDIC works to protect depositors promptly. Here is what typically happens:
- Immediate takeover by the FDIC: The FDIC immediately takes over the failing bank. This is often done over a weekend, so the slightest disturbance to bank customers will result.
- Account Transfers: The FDIC usually finds a healthy bank to take over the failed bank’s deposits. Customers can often continue using their money by the next business day, even if the name on the door changes.
- Direct Payments: If the FDIC cannot find a buyer for the failed bank, it pays depositors directly. The FDIC will mail checks for insured deposits up to the $250,000 limit.
- Deposits over FDIC Insurance Limits: Here is where things can get a little more complicated. The uninsured depositors may receive partial recoveries of their bank deposits, depending on the recoveries realized from the assets of the bank. The most important thing is that the FDIC will focus on the repayment of the insured deposits.
Other Safety Measures to Consider
While FDIC insurance sufficiently covers your deposits, the following are a few measures you can take to ensure additional safety for your deposits:
- Bank ratings and financial health: Periodically review and check your bank’s financial health and ratings. BauerFinancial and Weiss Ratings can also help you obtain information about your bank’s soundness.
- Do Not Put All Your Money in One Bank: Diversification of funds is a way of avoiding risk. This method of spreading the failure risk across many banks is workable, especially with huge sums exceeding the FDIC insurance’s limits.
- Stay Alert with Cybersecurity: The bank’s safety refers not only to the bank’s failure but also to the safety of one’s accounts against fraud and other cyber threats. Your bank should have security authentication, for example, with good encryption standards.
- Monitor your accounts regularly: Regularly checking bank statements and recent account activities will help you report unauthorized transactions and discrepancies sooner.
FDIC insurance is a cornerstone of the U.S. financial system, providing comfort for depositors, knowing that if a bank fails, their money is safe. By learning the limits of what is covered and how different account types and ownership categories work, one has the strategies to maximize the protection of these types of deposits. Furthermore, keeping track of the bank’s health and sound financial practices will ensure, to the maximum, that your hard-earned money stays.
Whether you save for a rainy day, work on your retirement plan, or pay for ordinary expenses in life, the security of knowing that your money is in safe hands with FDIC insurance is integral to good financial planning. Make sure your bank is FDIC-insured, know your coverage limits, and protect your financial future.
