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July 06, 2016 | credit-union-advocacy

How Federal Deposit Insurance Works

Government-sponsored deposit insurance has been around since 1933, and it offers significant peace of mind when it comes to keeping your hard-earned money safe.

It’s a bonus not offered to everyone around the world, but if you’re banking at an FDIC-insured bank or NCUA-insured credit union in the U.S., you automatically get free federal deposit insurance covering your deposits of up to $250,000 per vehicle. The International Association of Deposit Insurers reports that in 2014 only 113 countries offered explicit deposit insurance.

Since the early 1930s no one so insured has lost a penny of their insured principal or interest, regardless of whether it’s been part of a checking account, savings account, money market deposit account, certificate of deposit (CD) or negotiable order of withdrawal (NOW) account. Cashier’s checks and money orders are also protected.

Fortunately, since 1970 credit unions have enjoyed the same free governmental safeguards as banks. The nonprofit money cooperatives first became popular in the 1920s to meet the growing demand for inexpensive credit so families could buy larger-ticket items like cars and appliances. These days there are about 7,000 credit unions with more than 100 million members in the U.S.

Deposit insurance was instituted after the failures of U.S. banks in the 1920s and '30s. Though bank or credit union failure is rare today, it does happen. Between 2008 and 2013, 5 percent of lower-asset banks closed across the U.S., says a study by the Conference of State Bank Supervisors.

Most banks and credit unions these days are federally insured in order to remain competitive, but you can double check the status of yours by visiting the FDIC’s BankFind tool or Researching a Credit Union with the NCUA. Note that the U.S. government does not insure stock investments, bond investments, mutual funds, life-insurance policies, annuities, municipal securities, U.S. Treasury bills, bonds or notes, or the contents of safe deposit boxes.

Maximizing Your Federal Deposit Insurance Coverage

If you’re risk averse, you may want to form a strategy for fully protecting all of your deposits via the NCUA or FDIC. There are several ways to do that, and this handy Deposit Insurance Calculator might help.

One method is to divide your assets among several institutions, such that you deposit $1 million into five $250,000 accounts at five different institutions so they’re each insured for the maximum $250,000. And no, dividing money among different branches of the same institution doesn’t count.

Another strategy is to divide your funds between single and joint accounts; retirement accounts; revocable and irrevocable trust accounts; employee benefit plan accounts; government accounts, and corporation, partnership or unincorporated association accounts. You might also take advantage of different caveats for different vehicles; for example, a revocable trust account that names three different beneficiaries may be subject to $750,000 worth of insurance.

Some ways a couple might distribute $500,000 worth of funds for maximum coverage include:

  • Rufus and Esmerelda Jones opt to become co-owners on several deposit accounts, placing $50,000 in an MMDA (money market deposit account), $150,000 in savings and $300,000 in a C.D. at the same credit union. Because the accounts are joint and each person is allotted $250,000 in coverage, the total $500,000 will be insured. If they deposit more or accrue interest in any of those accounts, the added amount won’t be covered.
  • Rufus and Esmerelda open separate savings accounts for $250,000 at the same credit union. Then they jointly invest in a $250,000 Certificate of Deposit (CD) at the same credit union. Because they’re mixing up single and joint vehicles, the entire $500,000 will be insured.
  • Rufus opens a $200,000 business savings account and buys a $300,000 C.D. from the same credit union under his sole proprietorship, Jones Pet Supply. Even though he names several authorized signers for the two vehicles, he is insured only for $250,000 because he is the sole owner of both accounts.
  • Esmerelda has a $250,000 traditional IRA, plus a $250,000 Certificate of Deposit (CD) in the same credit union. Her assets are insured at $500,000 because retirement accounts are insured separately.

Coverage can be a bit more difficult to determine if you’re investing in multiple single and joint vehicles (in different categories) at a single institution, and especially if you add beneficiaries to the accounts. For example:

  • Rufus and Esmerelda open a joint MMA account with $100,000. At the same credit union, Rufus opens a single checking account with $100,000 and Esmeralda buys a C.D. for $100,000. Then they establish a $200,000 living trust in which their two children are listed as beneficiaries. Because they’re using differently categorized vehicles and they list two qualified beneficiaries on their trust, they’re insured for the entire $500,000.

More About Credit Unions

Curious about the growing credit union movement? More and more people are joining credit unions every day, preferring to do their banking with a member-owned financial cooperative instead of with traditional banks. Learn more here about how Credit Unions Offer the Highest Savings Rates, or check out our list of reasons why Credit Unions Are the Best Place for Your Savings. Or if you're ready to become an Amplify member and start earning higher dividends on your savings, you can get started here.