What is FDIC Insurance?

by | Jan 22, 2024 | Blog

If you have money in a bank account, you have probably heard about FDIC insurance.  But what is it?  In this post we’ll break down what FDIC insurance is, what the limits are, who it protects, and more.

What is FDIC insurance?

Before we break down what FDIC insurance is, it might be helpful to first talk about what the FDIC is and what they do.

The FDIC is in the business of bank regulation.  When it comes to bank regulation, there are three federal agencies and fifty state agencies involved.

If the bank is federally or nationally chartered, it is regulated by the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC).

State-chartered banks are subject to regulatory authority of the particular state in which it’s located, as well as the Federal Reserve and the FDIC.

To quote the FDIC website:

“The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects bank depositors against the loss of their insured deposits in the event that an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.”

So now that we have an understanding of what the FDIC is, and what they do, let’s discuss FDIC insurance and how it applies to you.

FDIC deposit insurance protects individuals in the event that an FDIC-insured bank fails. Last year, when Silicon Valley Bank and Signature Bank failed in the span of a few days, FDIC insurance became a VERY popular topic for folks.

It’s important to note that bank customers don’t need to purchase FDIC insurance; it is automatic for any deposit account opened at an FDIC-insured bank.

Are there limits to FDIC insurance?

Yes, there are limits to how much coverage an individual can have with FDIC insurance.  The standard insurance amount is $250,000 per owner, per insured bank for each ownership category.  This can be kind of confusing, so we’ll walk through an example that will hopefully make it easier to understand.

The different types of ownership categories are: individual accounts, joint accounts, revocable trusts, and/or IRAs.

For example, if a married couple has an individual account (each), a joint account, and a revocable trust – how much FDIC insurance could the couple have at this one bank?

The answer is actually $1,500,000.  The husband and wife each get $250,000 of coverage in their individual accounts for a total of $500,000.  They also get $500,000 of coverage in their joint account.  AND they each get $250,000 as trust beneficiaries of each other’s trust.

What happens if you exceed the FDIC insurance limits in any given account?

Let’s not confuse FDIC insurance limits with account maximum amounts.  You can have as much money as you’d like in most bank accounts.  However, the amount OVER the FDIC insurance limit will NOT be covered if something happens to that bank.

For example, if you have $650,000 in an individual bank account and that bank fails – you will be insured for $250,000 of that balance and (likely) out of luck on the other $400,000.

For that reason, it’s important to pay attention to these FDIC insurance limits.  Banks don’t fail very often.  It would likely take something catastrophic happening for your bank to fail, but IF it does, you want to be sure that your accounts are fully insured.  Remember what we said before, these limits are PER BANK.  That means you get the same FDIC insurance coverage at any bank.

In that last example if you’re worried about exceeding the insurance limits on your $650,000, you can open accounts at multiple different banks and deposit up to $250,000 in each to make sure you’re fully insured.

We fielded a LOT of questions about this very topic last year when Silicon Valley Bank and Signature Bank failed.  It doesn’t happen often, but when it does, it’s very important to make sure you’re protected.

Are all type of products insurable with FDIC insurance?

No.  The types of accounts and products that ARE insurable include checking accounts, savings accounts, Money Market Deposit Account (MMDAs), and Certificates of Deposit (CDs).

The types of products that are NOT insurable with FDIC insurance include stock investments, bond investments, mutual funds (including money market mutual funds), and U.S. Treasury bills/bonds/notes.

When a bank fails, how does the FDIC step in?

Like we’ve mentioned before, it hasn’t happened often but if it DOES happen to you – how does the FDIC respond if a bank fails?  The FDIC website, again, plainly spells it out for us:

“First, as the insurer of the bank’s deposits, the FDIC pays insurance to depositors up to the insurance limit. Historically, the FDIC pays insurance within a few days after a bank closing, usually the next business day, by either 1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or 2) issuing a check to each depositor for the insured balance of their account at the failed bank.”

It’s important to know the ins and outs of FDIC insurance.  If you have further questions about FDIC insurance or how much coverage you have, please don’t hesitate to get in touch with us!  Click the “Schedule a Consultation” button on this page, and we’d be happy to have a conversation with you.