Bank Insurance FDIC: What is it and how does it work?

When you deposit money into a bank, you expect it to be safe and secure. But what happens if the bank fails or goes bankrupt? Fortunately, there is an insurance program that protects your deposits called the Federal Deposit Insurance Corporation (FDIC). In this article, we will provide an in-depth overview of what the FDIC is, how it works, and what it covers.

What is the FDIC?

The FDIC is an independent agency of the United States government that provides deposit insurance to protect depositors in the event of a bank failure. The FDIC was created in 1933 in response to the Great Depression when many banks failed, leaving depositors without access to their money.

Today, the FDIC insures deposits at banks and savings associations up to $250,000 per depositor, per account ownership category, in the event of a bank failure or closure. This means that if your bank fails, your deposits are insured up to $250,000 per account, making it a critical component of the U.S. banking system.

How does the FDIC work?

The FDIC is funded by premiums paid by banks and savings associations that are insured by the FDIC. The premiums are based on the financial health of the institution and the amount of deposits it holds. The FDIC uses these premiums to build up a reserve fund, which it uses to pay depositors when a bank fails.

If your bank fails, the FDIC will step in and take over the bank’s assets and liabilities. The FDIC will then repay insured depositors up to the insured amount using its reserve fund. The goal of the FDIC is to ensure that depositors have access to their insured funds as quickly as possible, typically within a few days.

What does the FDIC cover?

The FDIC covers deposits held in checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs) at FDIC-insured banks and savings associations. The insurance coverage applies to both principal and accrued interest up to the insured amount.

In addition, the FDIC covers certain types of retirement accounts, such as individual retirement accounts (IRAs) and self-directed defined contribution plans. These accounts are insured up to $250,000 per depositor, per plan.

FDIC Insurance Limits

One of the most important things to understand about FDIC insurance is the coverage limits. As we mentioned earlier, the FDIC insures deposits up to $250,000 per depositor, per account ownership category. But what does that mean?

Let’s say you have a checking account with $100,000 and a joint savings account with your spouse with $300,000. Your deposits are insured up to a total of $550,000 because:

• Your checking account is insured up to $250,000
• Your savings account is insured up to $250,000 per depositor, per ownership category (joint accounts count as one owner), so you are insured for $500,000

If you have accounts at multiple banks or savings associations, the FDIC insures each account separately up to the $250,000 limit. This means that if you have $400,000 in deposits split between two banks, each account is insured up to the $250,000 limit, and the remaining $100,000 is not insured.

FDIC Coverage Exclusions

It’s important to note that not all deposits are insured by the FDIC. The following types of deposits are not insured:

• Investments, such as stocks, bonds, and mutual funds
• Safe deposit boxes or their contents
• Deposits at non-FDIC-insured institutions

Additionally, the FDIC may not insure certain types of deposits that exceed the $250,000 limit, such as large deposits made by businesses, nonprofits, or government entities.

FAQ

Is FDIC insurance free?

No, FDIC insurance is not free. Banks and savings associations that are insured by the FDIC pay premiums based on the amount of deposits they hold and their financial health. These premiums are used to build up the FDIC’s reserve fund, which is used to pay depositors when a bank fails.

How do I know if my bank is FDIC-insured?

You can check if your bank or savings institution is FDIC-insured by looking for the official FDIC sign, which should be prominently displayed at your bank’s branches or website. You can also use the FDIC’s BankFind tool to look up your bank’s FDIC insurance status.

What happens if my bank fails?

If your bank fails, the FDIC will step in and take over the bank’s assets and liabilities. The FDIC will then repay insured depositors up to the insured amount using its reserve fund. The goal of the FDIC is to ensure that depositors have access to their insured funds as quickly as possible, typically within a few days.

What should I do if I exceed the FDIC insurance limits?

If you have deposits that exceed the FDIC insurance limits, you should consider spreading your deposits across multiple banks or opening accounts with different ownership categories (such as single accounts, joint accounts, and revocable trust accounts) to maximize your FDIC insurance coverage.

What happens if I have a loan with a bank that fails?

If you have a loan with a bank that fails, your loan will likely be sold to another financial institution. You will then make payments to the new institution as you would with your original loan. Your loan terms and conditions, including interest rate and repayment schedule, will not change.

Conclusion

The FDIC plays a critical role in protecting depositors and maintaining the stability of the U.S. banking system. Understanding how FDIC insurance works is an important part of managing your finances and ensuring the safety of your deposits. By following the guidelines outlined in this article, you can ensure that your deposits are fully insured and protected in the event of a bank failure.