FDIC insurance protects customer bank deposits in the event of a bank failure. The Federal Deposit Insurance Corporation, the independent government agency that runs the program, was set up in 1933 to restore faith in the financial system during the Great Depression. After all, when you entrust your life’s savings to a bank, you expect that money to be there when you need it.
But what does FDIC insurance cover? What are its limitations? And are there ways you can truly protect all of your money?
Is Your Money Fully FDIC Insured?
While you don’t need to do anything special to apply for FDIC insurance, you do need to be aware of its limitations. You may have heard that there’s a $250,000 cap on FDIC insurance, but there’s more to the story — for instance, you can have more than $250,000 in deposits at the same bank and still be completely covered, depending on the type of accounts you have.
We’ll break down the FDIC’s requirements step by step so that you can easily double-check whether all of your money is insured.
Step 1: Make sure your money is at an FDIC member bank
FDIC member banks are required to post the FDIC logo both inside the bank and on their websites. Practically every bank has FDIC insurance these days, though it’s worth double-checking if you’re unsure. While there is no requirement that banks be FDIC members, stiff competition in banking has made it extremely hard for non-member banks to compete.
Note that credit unions are insured by a different federal fund called the National Credit Union Share Insurance Fund, which is very similar to the FDIC.
Step 2: Make sure your money is in the right kind of account
Once you know you’re doing business at an FDIC member bank, now it’s time to make sure your deposits are in an account that the FDIC will cover. FDIC insurance covers most of the accounts you’ll deal with in day-to-day banking, but not some more complex investments:
|Insured by FDIC||NOT Insured by FDIC|
|Checking accounts||Mutual funds|
|Money market accounts (MMAs)||Bonds|
|Certificates of deposit (CDs)||Annuities|
|Negotiable orders of withdrawal (NOW)||Treasury or municipal securities|
|Cashier’s checks||Life insurance policies|
|Money orders||Contents of safe deposit boxes|
Step 3: Make sure you don’t exceed $250,000 per insured category
Once you’ve confirmed that you have the right kind of deposits at an FDIC member bank, you’ll want to make sure you don’t have more than $250,000 per insured category. (Note that this cap includes the principal you originally deposited, plus any interest accrued or owed on the account.) As you can see, these categories are different than the types of covered deposits listed above:
- Single accounts
- Joint accounts
- Certain retirement accounts (includes traditional and Roth IRAs and self-directed 401(k) plans)
- Revocable trust accounts
- Irrevocable trust accounts
- Employee benefit accounts
- Corporation/partnership/unincorporated association accounts
- Government accounts
One of the most important things to note from this list is that single accounts (held by just one person) and joint accounts (held by two or more people) are separate categories.
So if you have $50,000 in a checking account and $250,000 in a savings account that are both in your name only, you’ll be covered only for $250,000 of that $300,000 — that’s because both accounts are single accounts. But if the savings account is a joint account co-owned by someone else, such as your spouse, all $300,000 is covered because the money is divided between two separate categories: single accounts and joint accounts.
The FDIC may still fully cover a joint account with a balance exceeding $250,000. That is because each account owner is insured for up to $250,000.
For example, you and your spouse may have two joint savings accounts: One has $400,000 in it, and the other has $100,000 in it. You’re insured for the entire $500,000 — $250,000 per co-owner — even though one of the accounts is significantly more than $250,000. Note that unless your bank records say otherwise, FDIC insurance assumes each owner of a joint account holds an equal share of that account.
Let’s look at one more example with accounts held by multiple people across multiple categories.
|Joint savings account||Bob and Mary||$150,000|
|Joint savings account||Bob, Mary, and John||$600,000|
|Individual retirement account (IRA)||Bob||$200,000|
|Individual retirement account (IRA)||Mary||$200,000|
In the above example, Bob has accounts in three categories: single, joint, and retirement. His checking account (single) and IRA (retirement) are fully covered, as neither of their balances exceed the $250,000 limit.
However, Bob has two joint savings accounts: One with Mary, and one with Mary and John. His share of the first account is $75,000 (the $150,000 balance divided between two owners), and his share of the second account is $200,000 (the $600,000 balance divided between three owners).
That’s a total of $275,000 in just one account category, which means $25,000 of the cash he has stashed in these two joint accounts is not FDIC-insured; it’s over his limit for the category. The same goes for Mary. But all of John’s money is safe, because his $200,000 share is under the $250,000 limit.
For more examples regarding FDIC insurance and other account categories, including trusts that have multiple beneficiaries, head to the FDIC’s website.
A Special Note on Retirement Accounts
Chances are you aren’t quite as loaded as Bob and Mary in the example above. Of all the FDIC’s account categories, the average Joe or Jane will probably stand the most chance of pushing his or her $250,000 limit in the retirement account category.
If you’ve established a retirement account such as an IRA at an FDIC member bank, the money in it is only insured as long as your funds are invested in FDIC-approved accounts. For instance, if some of your money is in a CD or money market account, that’s FDIC insured; if another portion is in stocks, mutual funds, or bonds, that’s not insured. If you’re concerned, be sure to double-check, as your bank likely sells investment products that are not FDIC insured.
Why Was the FDIC Established?
When the stock market crashed in 1929 and the Great Depression took hold in the 1930s, panicked depositors rushed to their banks and tried to withdraw their money en masse. Many banks couldn’t meet their obligations, leading thousands of them to fail in four separate bank panics. By 1933, a staggering one-fifth of all banks that had been operating in 1930 had gone belly-up.
To prevent further bank panics, President Franklin D. Roosevelt signed the Banking Act of 1933, which included several banking reforms. Perhaps the largest was the establishment of the FDIC, which helped restore public confidence in banks by insuring depositors’ funds with government money.
Is There Really Much Risk of a Bank Failure Today?
It’s easy to dismiss the bank failures of the 1930s as ancient history, but banks can and do fail to this day — in fact, four have failed so far in 2015.
There have been two major waves of bank failures since the Great Depression, and both are relatively recent. The first wave, during the savings and loan crisis of the 1980s and early 1990s, saw more than 1,600 banks fail or receive FDIC assistance. The second wave, during the subprime mortgage crisis, saw 465 more banks fail between 2008 and 2012 — that includes Washington Mutual in 2008, which is the largest-ever bank to fail in U.S. history. In fact, more than 500 banks have failed since 2000, and the FDIC continues to maintain a confidential list of “problem banks” that are at high risk of not being able to meet their financial obligations.
If My Bank Fails, How Does the FDIC Protect Me?
If a bank fails — meaning it doesn’t have enough money to pay back its depositors or fulfill obligations to creditors — the FDIC takes a series of swift steps to control the situation.
First, the FDIC seizes control of the bank’s assets. This is done in a secret, highly orchestrated operation to avoid causing panic among depositors. Then the FDIC usually finds another institution to take over the failed bank, and all of your deposits are simply transferred in a surprisingly seamless process. Often, the hard work is done over the weekend, and the bank may even reopen as usual on Monday morning. You’ll never actually lose access to your money.
In the much rarer instance that the FDIC is unable to find a new institution to acquire your failed bank, it will cut you a check for your covered deposits within a few business days.
What If Some of My Money Isn’t FDIC-Insured?
If you have uninsured deposits and a new bank hasn’t agreed to take over your old bank, you’ll likely have to wait for the FDIC to sell off your bank’s assets to see how much money you’ll get back. Unfortunately, you may only see a portion of that uninsured money when all is said and done. It’s possible to get all of it back, but the average is 72 cents on the dollar.
The simplest way to avoid this fate is to maintain accounts under FDIC insurance limits at several separate FDIC-insured banks. Banks tend to offer their best benefits to high-balance accounts, so it’s unlikely you’ll need to pay the maintenance fees that could otherwise make this arrangement expensive. For a peek at some of the best accounts out there, be sure to check out our guides to the best free checking accounts and the best savings accounts.
If that’s too inconvenient, some banks and credit unions do offer private deposit insurance, but you’ll need to check to see whether this is an option. One program called the Certificate of Deposit Account Registry Service allows you to divide CDs among in-network banks but manage your money through your original bank.
How Is the FDIC Funded? Does it Have Enough Money?
You may be wondering how the FDIC is able to pay depositors what they’re owed when banks fail. Good question — but unlike what you might assume, it’s not with your tax dollars.
In fact, the FDIC doesn’t get any money from Congress. Rather, member banks pay premiums to fund the FDIC, which then makes those premiums grow by investing in Treasury securities. (Of course, just because your taxes don’t go to the FDIC doesn’t mean you aren’t paying the cost of this insurance indirectly. You likely pay in the form of lower interest rates at the bank, which means your money doesn’t grow quite as fast as you’d like.)
Since the FDIC was established, no one has lost any portion of an FDIC-insured deposit despite numerous bank failures. That’s a pretty good track record, but can we be comfortable that the FDIC will continue its winning streak?
At the end of 2014, the FDIC had about $62.8 billion in its insurance fund. That sounds like a huge amount until you consider that the FDIC’s more than 6,500 member banks have insured assets totaling more than $15.5 trillion — many, many times what the FDIC actually has on hand.
The subprime mortgage crisis also touched off a lot of consolidation among banks as larger, more stable institutions absorbed their riskier counterparts. The five biggest banks in the U.S. now control an astronomical 45% of banks’ assets, compounding worries that the collapse of any single one of them would cause an economic catastrophe.
To address these concerns, the FDIC and other federal regulators are requiring these “too big to fail” banks to submit “living wills” that outline how they could shut their doors without using massive government bailouts as a crutch.
Despite all of this, there’s probably no reason to panic. That’s because the FDIC has the power to borrow up to $500 billion from the U.S. Treasury to make good on FDIC-insured deposits. And if that isn’t enough to absorb a massive failure, the FDIC also has the “full faith and credit” of the U.S. government. Basically, that means Uncle Sam will do whatever it takes to ensure you don’t lose a dime, even in the most dire circumstances.
Don’t Take FDIC Insurance for Granted
FDIC insurance should be a big comfort to anyone who wonders whether their cash would be better off stashed under their mattress. As the FDIC’s website trumpets, “no depositor has ever lost even one penny of FDIC-insured deposits.” And while the nation’s growing mega banks pose undeniable challenges going forward, regulators are being proactive to make sure the FDIC can maintain its perfect record.
While you don’t have to do anything special to get your deposits insured by the FDIC as long as you’re using a member bank, remember that the insurance is subject to several limitations. Your insurance will be capped at $250,000 in any single account category, and more sophisticated investment vehicles such as stocks, bonds, and annuities are not protected.
Now that you know exactly how the FDIC protects your deposits, you might want to give a little more thought to the accounts you’re using to stash your cash. The Simple Dollar offers guides on the best free checking accounts, the best savings accounts, the best money market accounts, and how to find the best CD rates.