FDIC insurance: What it is and how it works

The FDIC insures up to $250,000 per depositor, per FDIC-insured bank, per ownership category when an insured bank fails. This guarantees consumers that their money is safe if an FDIC-member bank fails, as long as their balances are within the limits and guidelines.

Here’s what you need to know about how your money is backed by the government through the FDIC and the limits of such insurance.

What is FDIC insurance?

The FDIC is the agency that insures deposits at member banks in case of a bank failure. FDIC insurance is backed by the full faith and credit of the U.S. government.

The thought of your bank failing could be alarming, but if your bank is insured by the Federal Deposit Insurance Corp. (FDIC), your money in that bank is protected by the federal government — up to a limit. It’s a good idea to review the deposit insurance for your bank accounts now to be sure you’re covered.

FDIC insurance: What’s covered and what isn’t

What FDIC insurance covers

FDIC insurance covers traditional bank deposit products, including checking accounts, savings accounts, certificates of deposit (CDs) and money market accounts.

The FDIC classifies deposit accounts into several ownership categories. These include:

• Single accounts
• Joint accounts
• Corporate accounts
• Retirement accounts

If an account holder has more than $250,000 in accounts that fall under a single ownership category at one bank, anything over that amount isn’t insured.

An individual account is insured separately from a joint account, since they’re distinct ownership categories. Joint accounts are insured for $250,000 per co-owner, so a $500,000 CD owned by two joint account holders would be fully insured because each account holder is insured for up to $250,000.

Likewise, accounts owned by corporations or partnerships are also considered a distinct ownership category. That means that businesses with more than $250,000 in their bank account won’t get the excess amount insured, unless they split the funds between different banks, since each bank gets its own insurance limits.

If, for example, Sarah has $250,000 in a joint savings account and $200,000 in a checking account as a single owner, her money is fully insured. Even though the total deposits exceed $250,000, the money is split between different ownership categories, so each account is insured separately.

On the other hand, if Cameron has $200,000 in a high-yield savings account and $125,000 in a CD at the same bank in his name alone, $75,000 of his deposits won’t be insured. To make sure his money is entirely federally insured, he could open an account at a separate FDIC-insured bank or transfer some of the money into a jointly owned account. Keep in mind there are legal and tax implications of a joint bank account, so understand how a joint bank account works.

FDIC insurance also protects interest earnings, as long as the principal and interest combined don’t exceed the $250,000 cap. Now, if you have $248,000 in a CD account that has earned $2,000 in interest, the full amount is covered because your account doesn’t exceed the insurance limit.

What the FDIC doesn’t cover

The FDIC doesn’t insure investments.

Here are some items that aren’t bank deposits and aren’t covered by FDIC insurance, even if they’re in an account with a bank’s name on it or if you bought one at a bank:

• Stocks
• Bonds
• Mutual funds
• Annuities
• Life insurance policies

The FDIC also doesn’t cover the contents of your safe-deposit box either. Payment providers, such as PayPal and Venmo, also don’t qualify for FDIC insurance because they aren’t banks.

If you’re not sure whether all your deposits are FDIC-insured, talk to a bank representative or use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) and enter information about your accounts.

How to guarantee all of your deposits are insured

If you have less than $250,000 at a federally insured bank, all of your money is protected. Once you exceed that amount, you can safeguard your money and maximize insurance protection with a little strategic organization.

Examples of how to insure all your deposits:

Use multiple banks. Spreading your money between different FDIC-insured banks is one way to keep your cash protected. If, for example, you had $300,000, you could keep $200,000 at Bank of America and $100,000 at Chase (both banks are members of FDIC).

Consider a trust. A trust is a legal vehicle that enables a third party — a trustee — to hold and direct assets in a trust fund on behalf of a beneficiary. The advantage of a trust is that it expands your options when managing your assets. Trusts also afford more protection because as many as five beneficiaries are insurable for up to $250,000 each.

Keep your cash in different account categories. Joint account ownership offers more protection if your federally insured bank fails than single-account ownership because each account owner is insured for up to $250,000. So, if a couple had $500,000 in a joint savings account, their money would be insured by the FDIC — if they didn’t have any other money in a joint account at that bank. A savings account of a single owner with $500,000 would only be insured for half that amount.

The table below shows how different account ownership categories can affect your deposit insurance coverage.

How the FDIC pays you back after a bank fails

Depositors don’t need to file insurance claims to recoup their deposits. Nor do they need to apply for deposit insurance when they open up a bank account at an FDIC-insured institution.

When a bank fails, the FDIC pays depositors by giving them an account at another insured bank in the amount equal to what they had at the failed bank, up to the insurance limits. If there’s no bank to acquire the deposits, the FDIC simply issues the depositor a check usually within a few days. The former is usually what happens when a bank fails.

Note that while the FDIC guarantees depositors won’t lose any money up to the covered amount, there’s no guarantee that if the funds move to a new bank they will earn the same interest rate. However, depositors can always withdraw the funds after a new bank acquires them with no penalty.

It can take a few years to recover deposits that exceed the insurance limit. As the FDIC sells off a failed bank’s assets, it typically issues periodic payments to depositors. Funds that exceed insurance limits are repaid on a cents-on-the-dollar basis.

Silicon Valley Bank, for example, didn’t have insurance coverage for more than 94 percent of its total deposits as of the end of 2022, according to the Federal Reserve. The FDIC announced it would pay back uninsured deposits in receivership certificates and dividend payments as it sells the closed bank’s assets.

Still, it’s best to make sure your deposits don’t exceed the FDIC limits, so you can readily access your insured funds as soon as the failed bank is acquired by another bank or the FDIC pays off closed accounts.

FAQs about FDIC insurance

• Why was the FDIC created?

  The FDIC was created in 1933 to protect consumers when financial institutions fail and are forced to close their doors.

  During the Great Depression, insurance for banks was not available. So when banks failed, Americans lost their savings. Now when banks fail, the FDIC steps in to protect depositors and their money.

  “Bank failures are unusual,” says Mark Hamrick, Bankrate’s senior economic analyst and Washington bureau chief. “But when they happen, affecting covered institutions, FDIC coverage is important.”

  Having that insurance is a crucial backstop to financial uncertainty. Consumers can ensure that all of their deposits within the insurance guidelines are guaranteed by the government, and they don’t have to worry about withdrawing their money from the bank.

  If your bank fails, the FDIC will pay out the insured amount by either setting up a new account at another bank or issuing you a check within a few days – often the next business day — so you should have access to your money pretty quickly.

  Generally, you can continue to bank as if a failure didn’t happen immediately after a bank failure is announced.

• Which institutions are covered by FDIC insurance?

  Most banks, including online-only banks, offer deposit customers FDIC insurance.

  An online bank that’s FDIC-insured has the same FDIC coverage as a brick-and-mortar bank. If you open an account with an FDIC-insured bank, you are automatically enrolled in the federal insurance.

  It’s rare for a bank not to have FDIC insurance, but there are exceptions. Bank of North Dakota, for example, is not FDIC-insured. Instead, it is backed by the full faith and credit of the State of North Dakota.

  Credit unions are regulated differently from banks and have their own federal deposit insurance through the National Credit Union Share Insurance Fund (NCUSIF). The fund was created by Congress in 1970 to insure deposits in member credit unions.

  It’s administered by the National Credit Union Administration (NCUA), which charters, regulates and monitors federal credit unions. The insurance is similar to what the FDIC provides, with a $250,000 cap for each account and owner.

• Do I need deposit insurance?

  You don’t need to purchase deposit insurance because it’s automatic and free for any eligible account opened at an FDIC-insured bank. Even if you have more than the standard $250,000 coverage limit, you can strategically get more coverage by opening an additional account with a different FDIC-insured bank for the excess. You could also keep your cash within the same bank but in multiple accounts with different ownership categories.

Bottom line

In the event of a bank failure, FDIC insurance provides crucial protection for consumers’ deposits. With up to $250,000 in coverage per depositor, per FDIC-insured bank, per ownership category, it’s important for individuals and businesses to understand the limits and guidelines of this insurance.

While most banks, including online-only banks, offer FDIC insurance, it’s still important to confirm this coverage and make sure all deposits fall within the insured limits. By spreading deposits across different ownership categories, individuals can maximize their insurance protection. It’s always best to stay within the insurance limits to ensure quick and easy access to insured funds.