Some of the largest bank failures in U.S. history occurred just last year. The one-year anniversaries of the failures of Silicon Valley Bank, Signature Bank, and First Republic in 2023 serve as strong reminders to review the deposit insurance for your bank accounts. If your bank is insured by the Federal Deposit Insurance Corporation (FDIC), your money is protected by the federal government, but only up to a certain limit.
Here’s what you need to know about how your money is backed by the government through the FDIC and the limits of this insurance.
What is FDIC insurance?
The FDIC insures deposits at member banks in the event of a bank failure, and this insurance is backed by the full faith and credit of the U.S. government.
The FDIC covers up to $250,000 per depositor, per FDIC-insured bank, per ownership category. This ensures that your money is protected if a bank fails, provided your balances fall within these limits and guidelines.
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), Negotiable Order of Withdrawal (NOW) accounts, and money market deposit accounts.
The FDIC classifies deposit accounts into several ownership categories, such as:
- Single accounts
- Joint accounts
- Corporate accounts
- Retirement accounts
Each individual depositor is insured up to $250,000 per ownership category, per FDIC-insured bank. If an account holder has more than $250,000 in accounts within a single ownership category at one bank, any amount over $250,000 isn’t insured.
Individual accounts are insured separately from joint accounts because they fall into different ownership categories. For joint accounts, each co-owner is insured up to $250,000. For instance, a $500,000 CD owned by two joint account holders would be fully insured since each owner is covered for up to $250,000.
Corporate or partnership accounts are also considered a distinct ownership category. Thus, a business with over $250,000 in a single bank account won’t have the excess amount insured unless the funds are spread across different banks, each with its own insurance limits.
For example, if 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. Despite her total deposits exceeding $250,000, the funds are in different ownership categories, so each account is insured separately.
Conversely, if Cameron has $200,000 in a high-yield savings account and $125,000 in a CD at the same bank, all in his name alone, $75,000 of his deposits would be uninsured. To ensure full coverage, Cameron could open an account at a different FDIC-insured bank or transfer some funds into a jointly owned account.
FDIC insurance also protects interest earnings, provided the total of the principal and interest does not exceed the $250,000 limit. For instance, if you have $248,000 in a CD that has earned $2,000 in interest, the entire amount is covered since it does not surpass 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 them at a bank:
- Stocks
- Bonds
- Mutual funds
- Annuities
- Life insurance policies
The FDIC also doesn’t cover the contents of your safe-deposit box.
Payment providers like PayPal and Venmo aren’t eligible for FDIC insurance because they aren’t banks. However, there are some exceptions. For instance, PayPal offers pass-through FDIC insurance for funds directly deposited into a PayPal account. This means the insurance covers the funds held in a custodial account at an FDIC-insured bank partnered with PayPal, not PayPal itself.
If you’re unsure whether all your deposits are FDIC-insured, consult a bank representative or use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) to enter information about your accounts.
How to guarantee all of your deposits are insured
Depending on your circumstances, you might be able to keep your bank deposits insured by using different ownership categories.
For example, joint account ownership offers more protection than single account ownership because each account owner is insured up to $250,000. So, if a couple has $500,000 in a joint savings account, their money would be fully insured by the FDIC. In contrast, a single owner with $500,000 in a savings account would only have half of their money insured.
Trusts can also provide more protection. With a revocable trust, up to five beneficiaries can each be insured for up to $250,000.
Another strategy is to spread your money across different FDIC-insured banks to maximize insurance protection. Some bank networks can help you manage this.
The table below illustrates 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 a bank account at an FDIC-insured institution.
When a bank fails, the FDIC reimburses depositors by transferring their funds to an account at another insured bank, equal to their balance at the failed bank, up to the insurance limits. If no bank acquires the deposits, the FDIC issues a check to the depositor within a few days.
Although the FDIC guarantees that depositors won’t lose any money up to the insured amount, there’s no guarantee that the funds will earn the same interest rate at a new bank. However, depositors can withdraw their funds from the new bank without penalty.
Recovering deposits that exceed the insurance limit can take a few years. As the FDIC sells off the failed bank’s assets, it makes periodic payments to depositors. Funds exceeding insurance limits are repaid on a cents-on-the-dollar basis.
For instance, when Silicon Valley Bank failed, most of its deposits were uninsured, according to regulatory filings. The FDIC announced it would repay uninsured deposits through receivership certificates and dividend payments as it liquidates the bank’s assets.
To avoid complications, ensure your deposits don’t exceed FDIC limits, so you can quickly access your insured funds when the FDIC transfers them to a new bank or pays off closed accounts.
In Conclusion
In the event of a bank failure, FDIC insurance provides essential protection for consumers’ deposits. Coverage includes up to $250,000 per depositor, per FDIC-insured bank, per ownership category. Understanding these limits and guidelines is crucial for individuals and businesses.
While most banks, including online-only institutions, offer FDIC insurance, it’s important to confirm this coverage and ensure all deposits are within the insured limits. By spreading deposits across different ownership categories, individuals can maximize their insurance protection. In the rare case of a bank failure, the FDIC reimburses depositors by transferring their funds to another insured bank or issuing a check. Staying within the insurance limits ensures quick and easy access to your insured funds.