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How Federal Deposit Insurance Works

Katie DuncanSeptember 26, 2022

Reviewed By: FINANCE WRITER

Old-fashioned people entering bank

Have you ever seen a sign at your bank saying that your funds were FDIC insured?

Chances are, you have! However, they are so commonplace in today’s banks that you probably didn’t give much thought to what it means or the role that the FDIC plays in the world of banking.

However, this government-sponsored deposit insurance— which has been around since 1933— offers significant peace of mind when it comes to keeping your hard-earned money safe.

Here’s more about the Federal Deposit Insurance Corporation and what it means for your bank accounts.

What is the Federal Deposit Insurance Corporation?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects the funds depositors place in banks and savings institutions. FDIC insurance is backed by the full faith and credit of the United States government.

In other words, if you have money in an FDIC-insured account, you don’t need to worry about losing your money due to bank failure, within specific limits.

If you’re banking at an FDIC-insured bank or NCUA-insured credit union in the United States, you automatically get free federal deposit insurance. Coverage extends to $250,000 per depositor, per ownership category, per insured bank.

Keep in mind 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.

Why was the FDIC created?

The FDIC was established in response to the Great Depression, during which thousands of banks failed and millions of Americans lost their life savings. In the years during and following the Depression, many laws and safeguards were put into place to get the nation back on its feet and ensure that an economic disaster of that magnitude never happened again.

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The FDIC was created to restore public confidence in the banking system by insuring deposits in banks and savings associations. Today, the FDIC continues to play a vital role in the American banking system by ensuring the safety of deposits and promoting the stability of the financial system.

Since the early 1930s, no insured depositor 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. Cashiers’ checks and money orders are also protected.

Though bank or credit union failure is rare today, it does happen. According to the FDIC, there have been 561 bank failures since 2001, most of which occurred in the few years following The Great Recession in 2008. Because it is possible, it’s important to bank with institutions that are FDIC insured.

Are credit unions covered by the FDIC?

Fortunately, credit unions have enjoyed the same free governmental safeguards as banks since 1970. However, instead of being insured by the FDIC, credit unions are insured by the National Credit Union Administration (NCUA). The same rules and coverage apply to NCUA-insured credit unions.

How to Maximize Your Federal Deposit Insurance Coverage

Remember— your money in the bank is safe, but only up to $250,000 per depositor, per ownership category, per bank. You may want to form a strategy for fully protecting all of your deposits via the NCUA or FDIC. Here are some strategies to consider.

1. Divide your money across several account types.

One common strategy is to divide your funds between ownership categories. Each category will give you $250,000 worth of coverage. Categories include:

  • Deposit accounts (Checking, savings, and CDs fall under this single category)
  • Retirement accounts
  • Revocable and irrevocable trust accounts
  • Employee benefit plan accounts
  • Government accounts
  • 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 covered by $750,000 worth of insurance.

2. Divide your money across institutions.

Another common method is to divide your assets among several institutions. For example, if you had $1 million that you wanted to be insured, you could deposit $250,000 into five accounts at five different institutions so they’re each insured for the maximum $250,000.

3. Open joint accounts.

Not only do joint accounts fall into their own category, but you also get the benefit of getting double the amount of coverage for one account. A joint checking account, for instance, is insured for up to $500,000, which amounts to $250,000 per person.

Say you and your spouse have nearly $1,000,000 that you wish to be insured. You can each open a single checking account and deposit $250,000. You then can open a joint checking account together, and because it falls under its own category, get insured for another $250,000 per person. In total, you and your spouse would be insured for $1,000,000 across three deposit accounts at the same bank.

Maximizing FDIC Coverage Examples

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

Example 1:

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.

Example 2:

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.

Example 3:

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.

Example 4:

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 from deposit accounts.

If you’re investing in multiple single and joint vehicles (in different categories) at a single institution, determining coverage can be complicated—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.

If you’re concerned about your coverage level and the details of which accounts are covered, it’s always best to talk to your financial institution to confirm.

Make Sure Your Money Is Covered

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.

If you are ever unsure about what money may or may not be insured, speak to a representative at your bank or credit union.

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Katie Duncan

Katie Duncan is a financial writer based in Austin, Texas. Her articles include financial advice for freelancers, homebuyers, and more. When she’s not writing, Katie loves traveling and exploring the outdoors with her friends and her dog, Poe.