Personal Finance 101: What Does FDIC Insurance Really Mean?

Understanding FDIC Insurance and What It Means In the Case of Bank Failure

personal finance 101One of the biggest things I encourage people to look for when they open a bank account is that the bank is FDIC insured. Most banks operating in the United States offer this insurance. In an era where people are more than a little worried about bank failures and the like, FDIC insurance is vital.

But what exactly is it?

Charlie writes in:

What exactly is FDIC insurance? How does it work? [A local bank] went under recently and seems to have been bought out by another bank and from what I understand the accounts are intact. Is that FDIC insurance at work?

(I edited out the bank in Charlie’s question for privacy reasons.)

What Is FDIC Insurance?

FDIC insurance refers to insurance policies created by the Federal Deposit Insurance Corporation, which is an organization wholly run by the government of the United States. The FDIC sells insurance policies to banks which insures the checking and savings accounts at those banks against the failure of those banks. Thus, when you open an account with a bank, that bank purchases insurance on that account for you from the FDIC.

FDIC insurance covers checking accounts, savings accounts, certificates of deposit, money market accounts, and cashier’s checks. It does not cover stocks, bonds, mutual funds, money market accounts, US treasuries, safe deposit box contents, or other such items.

Most banks that operate in the United States buy this insurance. When they do, they’re required to display the FDIC logo on signs in their business as well as on their websites.

FDIC insurance insures deposits up to $250,000 per depositor. This means that if your bank fails, the first $250,000 in your account is insured by the FDIC and will be returned to you in the event of a bank failure.

What Happens If My FDIC Insured Bank Goes Under?

If a bank that offers FDIC insurance becomes insolvent, the FDIC takes over that bank and all of the accounts held there. One of two things then happens.

In one type of takeover, called the “purchase and assumption” method, an already-existing bank takes over the accounts of that bank as well as some (or all) of the loans that bank has given out to customers. This purchase is usually done quickly. For you, the customer, this means that one morning, you’ll wake up and your bank account will be with a new bank. This is what happened when Wachovia failed and was taken over by Wells Fargo, for example.

In another type of takeover, called the “payout” method, the FDIC liquidates everything that’s left in the bank and then issues payouts for insured amounts to customers. So, if you have less than $250,000 in your accounts, you’d receive the full amount – if you had more, you’d just receive $250,000.

In either case, the process is really straightforward, usually involving minimal hassle from the customer. At most, you’ll simply need to open an account at a different bank (if your bank isn’t bought out or if you don’t like the new bank).

What If My Bank Doesn’t Have FDIC Insurance?

If your bank fails, you’re out of luck. You get nothing at all.

This is the reason why I encourage people to use banks that provide FDIC insurance. Luckily, almost all banks in the United States do offer it, but it’s worth checking just to make sure.

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  1. Lazo says:

    While FDIC insurance puts minds at ease, remember this when you walk into your community bank this week: the increase in FDIC insurance they pay increased probably 8x to 9x since the beginning of 2008. That said, a bank with approx $100 million in deposits was paying, lets say, $20,000/year for FDIC insurance. Since it hit the fan, that same institution is now paying around $160,000/year now. That, coupled with a “one-time” FDIC payment this year (lets say $50,000) and you can see why even “Main Street” banks are increasing fees. The cost of doing banking just went up everywhere, regardless where they are located.

  2. Sharon says:

    I have heard that while FDIC insured bank accounts are safe, it takes a long time for the accounts to get paid back. When my mother was worried about her bank collapsing, I told her to open a savings account in another back with enough money to get her through a month of absolute basics and get the form to change her direct deposit of her SS money filled out. If her original bank collapsed, she could file the form and live off of the money in the savings account until things were straightened out.

  3. Leah says:

    It should also be noted that the FDIC’s $250,000 amount is temporary. Until 2008, the cap was $100,000. Unless the President signs new legislation, the cap will return to $100,000 on Jan. 1, 2014.

    Something else you should make clear is that the FDIC only insures up to $250,000 per depositor, not per account. If you have four bank accounts each with $250,000 in them, you don’t get $1 million from the FDIC — you get $250,000.

  4. Lazo says:

    Leah: working in a bank, the $250k limit is going to be VERY difficult to let lapse, especially now that the banks are paying increased FDIC premiums to cover the increased amounts. The $100k amount was NEVER adjusted for inflation…so the $250k makes much more sense.

    Also, “$250,000 per depositor” is only partially correct. It gets much more complicated than that…if you have IRAs, set-up trust accounts, etc. at your financial institution.

    With respect to returning funds after a collapse, the bank I work for owned a CD at a failed bank – we received an FDIC check within 5 days if the failure. I believe the FDIC is responsible to get funds to customers “as soon as possible” – vague enough for you?

  5. Sharon says:

    Five days is great. I had heard up to two months.

  6. George says:

    Not all products a bank offers are FDIC insured, even when most accounts at a bank are FDIC insured, so check carefully. For instance, certain money market accounts do not carry FDIC insurance (wheras a CD will be FDIC insured).

    @Lazo – agreed that $250k is a more reasonable limit, but it still stands that the $250k limit is only temporary until it’s made permanent.

    @Leah – typically the depositer with more than $250k will get some money back above the $250k limit, like 20 cents or 50 cents on the dollar.

  7. George says:

    The $250,000 limit will expire on December 31, 2013 and fall back to a $100,000 limit unless legislation occurs between now and then.

    From the FDIC’s FAQ:

    “How long does the FDIC take to pay insurance on deposits after an insured bank fails?”

    Federal law requires the FDIC to make payment as soon as possible. Historically, the FDIC pays insurance within a few days after a bank closing either by establishing an account at another insured bank or by providing a check. Deposits purchased through a broker may take longer to be paid because the FDIC may need to obtain the broker’s records to determine insurance coverage.

    Customers with uninsured deposits receive the insured portion of their account as described above. They will wait longer to receive payment for some or all of their uninsured deposits. The amount of uninsured deposits they may receive, if any, is based on the sale of the failed bank’s assets. Depending on the quality and value of these assets, it may take several years to sell the assets. As assets are sold, uninsured depositors receive periodic payment on their uninsured deposit claim.

  8. George says:

    Credit unions do not use FDIC. There’s another entity (NCUSIF) that does insure their deposits up to $250k and, that limit too, will expire on December 31, 2013.

    130 banks have failed this year. That’s 5x the number that failed in 2008.

  9. Alice says:

    Money market accounts are listed in both the “covered by FDIC” and “not covered by FDIC” lists above. Can you please clarify?

  10. Lazo says:

    Alice: if I’m not mistaken, some money market accounts are backed by mutual funds. Those are the money market accounts that do not have FDIC insurance.

    Someone please correct me if I’m wrong.

  11. Robin Crickman says:

    It would be interesting to read what other
    insurance programs exist for other sorts of
    investments. I know (some) stock brokerages
    have an insurance program to protect investors’
    street held stock portfolios. And, as George
    mentioned, credit unions have their own program
    of insurance. Do mutual funds have anything?
    How are pension funds protected (if they are)?
    I’d like to read a summary about that.

  12. I’ve experienced a bank of mind failing and it was great to have the FDIC insurance. What would happen if the bank had not made the payment on that coverage?

  13. I’ve experienced a bank of mine failing and it was great to have the FDIC insurance. What would happen if the bank had not made the payment on that coverage?

  14. Rob says:

    Alice- Generally, Money Market Savings Accounts are offered by banks and credit unions,and are insured the same as “normal” savings accounts. Money Market Funds may be offered by banks but more typically come from brokerage and investment companies, and are not insured. Although companies can and often do protect MMF’s with methods including funneling their own money into the account to keep it from losing money, their is no guarantee and you’re on your own if that occurs.

    Most credit union accounts aren’t covered by the FDIC, but are insured by the National Credit Union administration(NCUA) in almost exactly the same way.

  15. AnnJo says:

    One of the bad results of FDIC insurance is that people have no incentive to investigate the financial stability of banks. I’ve done some “yield chasing” in the last year, and discovered that the highest yields (at least locally) seem to be offered by the weakest banks. Is it worth it for a small increase in yield to risk my bank folding?

    The FDIC has very tiny reserves to cover losses. The one thing it does have is the guns of the U.S. government, which give it the power to take what money it needs to cover FDIC-insured losses.

    But there is some point beyond which those guns will collect less and less money, and I’ve decided it is not responsible to completely ignore financial strength when choosing with whom I’ll do business. Sure, I could shift my possible losses to the American taxpayer, but, surprise! That’s me, too.

  16. tadeusz says:

    Please also write an article ,,what happens when my FDIC insured bank goes under, and then FDIC itself too”.

    I mean the stability of the federal government structures can be a source of additional risk.

  17. Justin Reese says:

    Is the limit per depositor period, or per depositor per bank?

    Let’s say I have $300k spread across two savings account with Chase, and $100k in a single savings account with BoA, and they both failed. Would I receive $250k (indicating a max $250k per depositor period) or $350k (indicating a max $250k per depositor per bank)?

    My assumption is the latter, since both banks are paying premiums to the FDIC.

  18. Justin Reese says:

    Bah, when I say “per depositor period”, that’s “period” as in an emphatic full stop, not “period” as in a length of time.

  19. Georgia says:

    I don’t think the rules have changed all that much. The insurance is paid per type of account. You and your husband could have an account with $100k (the old rate), you could each have one individually insured to $100 each, you could have one with each child, you could have a trust account, etc. and you would be insured by each to $100k. At the $100k rate we used to figure you could insure (for a family of four) up to $2.5 million at one bank. Husband as account with each child as joint tenants and also another set as trust accounts. Mother could also do the same. Also, in MO, there is another type of account for married people that requires both persons to sign to withdraw. All these separate accounts must be set up differently and each would be insured up to $100k. If anything has changed, remind me. Thanks.

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