What Is FDIC Insurance?
With talk of a government default, you may be wondering if your money is safe. Our complete guide to FDIC insurance will answer all your questions.
The FDIC has been protecting people and their bank deposits since 1934. How does FDIC insurance work, and what is the coverage limit today? Does FDIC protection extend to business bank accounts too?
Keep reading for the answers to these questions and more!
Table of Contents
What Is FDIC Insurance & How Does It Work?
FDIC insurance is a government-run insurance program. The Federal Deposit Insurance Corporation protects deposits made with regulated institutions such as banks. In the unlikely event that your bank goes out of business, the government will step in and make sure that none of the bank’s customers lose their money.
Federal protection for deposited funds was put in place as the US struggled to recover from the Great Depression, a period when 9,000 banks went out of business and the economy suffered. The FDIC successfully reassured citizens and prevented more bank failures. At that time, FDIC coverage was capped at $2,500, and that was enough to restore public confidence in the US banking system.
Today, the FDIC insurance limits are significantly higher than $2,500. The exact amount of FDIC coverage your deposits will have depends on a few factors, which we’ll cover below.
Does FDIC Insurance Work If The Government Defaults On Its Debt?
As the US heads toward the limits of the federal debt ceiling and the world waits to see if the government will default on its debts for the first time in US history, you may be wondering how your bank accounts might be affected.
Will the FDIC be able to guarantee the safety of deposit accounts in banks and savings associations if the US defaults?
Keep in mind that throughout its own history, dating back to 1934, FDIC insurance has ensured that no depositor has lost even a single cent of FDIC-insured funds due to bank failure.
The FDIC is funded by its member institutions, and not the federal government. So whether or not the government has the funding it needs to operate, the FDIC is solvent and ready to protect your eligible accounts.
FDIC insurance does not protect financial products other than eligible bank, credit union, and other savings association accounts. Your stocks, bonds, money market mutual funds, other types of securities and crypto assets are not FDIC-insured.
Given the current financial uncertainty, this might be a good time to look into putting some of your funds into a one of the best secure high-yield savings accounts for business.
Do All Banks Have FDIC Insurance Coverage?
Most, but not all, banks in the US qualify for deposit insurance under the FDIC. To qualify, a bank must meet cash reserves and liquidity requirements. If a bank slips beneath those limits, it will be issued warnings. If it doesn’t correct course, it could be closed and turned over to the FDIC in a process known as receivership.
We’ve seen that happen recently, with Silicon Valley Bank and Signature Bank in March 2023. More recently, in early May, First Republic Bank was taken over by JP Morgan Chase Bank, to protect depositors. In all these decisions, the FDIC took charge and acted to shut down banks deemed unsafe under clearly stated and well-known financial rules.
Are Credit Unions Covered Under FDIC?
No, credit unions are not covered under the FDIC. However, that doesn’t mean that deposits with credit unions are at risk.
Credit unions are part of a program similar to FDIC, called the National Credit Union Share Insurance Fund, which is administered by the National Credit Union Administration. Like the FDIC, the NCUA is backed by the “full faith and credit” of the federal government.
That means when you deposit money with a credit union, it’s safe. Just make sure to verify that the credit union you choose is an NCUA member.
Are Online Banks Covered By FDIC Insurance?
Are online-only banks that operate without any physical locations covered by FDIC insurance? Is your money safe if you choose online banking?
Most online “banks” are actually not banks at all but financial technology companies or fintechs, for short. These fintechs typically partner with chartered banks to offer banking services and credit cards, and they operate under their partner bank’s FDIC protections.
Online banks are generally as safe as brick-and-mortar banks. Just be sure to read the fine print or ask to make sure that their deposits are FDIC insured.
How Much Does FDIC Insurance Cost?
Unlike other kinds of insurance that protect assets, like your home, your car, and even your health, FDIC insurance doesn’t cost you anything.
The FDIC is fully funded by premiums paid by its member banks and savings associations. The US government does not contribute to FDIC funding, and consumers themselves do not have to pay or buy into the program in any way; coverage is automatic.
How To Tell If Your Bank Account Is Covered By The FDIC
Most banks in the US are covered by FDIC protections. That’s true whether your bank is brick-and-mortar or online only. Online banks typically partner with chartered banks and operate under their FDIC protections.
However, it’s up to you to make sure of that before you make any deposits.
If you don’t see that the bank is itself a member FDIC or protected by a partnership with a member FCIC, ask for proof before you hand over any funds. If you don’t see an FDIC affiliation, proceed at your own risk.
As long as you’re banking with an FDIC-affiliate institution, your checking accounts, savings, accounts, money market accounts, employee benefit plans, trust accounts, prepaid bank cards, and certificates of deposit all are covered by FDIC insurance.
Types Of Deposits Not Covered By FDIC Insurance
Not all savings institutions and not all types of accounts are covered by FDIC insurance. Even if you bank with a member FDIC, certain types of investments are not covered. According to the FDIC, the following products are not entitled to FDIC protection:
- Mutual funds
- Life insurance policies
- Crypto assets
- Safe deposit boxes and their contents
- US Treasury bills, bonds, and notes (these are backed by the US government in a different way)
Once you have an account established, you may receive offers for financial products by phone, through the mail, or online that look like they’re from your bank. While legitimate, these offers typically come from affiliated third parties who are required by law to make you aware that the products they’re offering are not covered by FDIC insurance.
The FDIC says to watch for statements like these:
- “This product is not a deposit or other obligation of, or guaranteed by, the bank.”
- “This product is subject to investment risks, including possible loss of the principal amount invested.”
- “This product is not insured by the Federal Deposit Insurance Corporation.”
FDIC Limits & What They Mean
FDIC insurance covers deposits in certain ownership categories, and the limits depend on the category and how the accounts are owned. The standard coverage is $250,000 per depositor for each ownership category in each FDIC-insured bank.
That seems a little confusing. So let’s break it down a bit.
Each “ownership category” is a separate account and is insured to the legal limit of $250,000 for each owner listed with that account.
So if you share a joint savings account with a spouse or business partner, and maintain a $500,000 limit, each of you is covered for $250,000 and your total balance is subject to FDIC coverage.
If you have two distinct savings accounts at a single bank, each account is insured for the full legal limit of $250,000. That means you can safely keep a total of $500,000 equally divided between those accounts. If your balance tops $500K, any amount over that would not be subject to FDIC protections.
If you are one of five beneficiaries of a trust held at a member FDIC bank, each of the beneficiaries is entitled to the limit of $250,000 for a total of $1.25 million.
These are just a few examples that should help you understand how FDIC limits work. If you have questions, be sure to ask your bank representative!
The Bottom Line On FDIC Insurance
The most important thing to understand about FDIC insurance is that it’s a government-backed program that protects the money you deposit with member banks. Most banks in the US offer FDIC protections, and they usually advertise their FDIC affiliation on the front door of their physical location or the landing page of their website.
If you aren’t sure if your bank of choice offers FDIC protections, ask. If the answer is no, reconsider your choice, because your money may be at risk.