The Federal Deposit Insurance Corporation (FDIC) is a federal government agency that protects depositors of insured banks from losing their funds when a bank that is insured fails. Ever since it was created in 1934, no depositor has lost a single penny of FDIC-insured deposits. This article will discuss FDIC insurance coverage, the accounts included, ownership types, and how deposit insurance is calculated.
What is the FDIC?
FDIC insurance covers deposits held in insured banks within the United States. Any person and/or organization is eligible to receive FDIC insurance from a bank that is insured, whether a citizen or a resident. FDIC insurance is backed by the government of the United States.
FDIC Insurance Coverage Basics
FDIC insurance will reimburse depositor accounts at all insured banks dollar for each dollar – principal and interest that has accrued all the way up to the date of the closing of the bank, subject to insurance limits. Deposit insurance’s maximum premium is $250,000 per depositor, per insured bank, per account ownership type.
The FDIC protects deposits including checking accounts, savings accounts, money market deposit accounts (or MMDAs) and certificates of deposit (or CDs). But it excludes stocks, bonds, mutual funds, cryptocurrency securities, life insurance, annuities, municipal bonds, safe deposit boxes, and U.S. Treasury bills, notes, or bonds.
Ownership Categories
The FDIC also offers insurance on money that depositors might hold in various legal ownership types. These categories include:
Single Accounts: Deposits held by a single user with no beneficiaries. This includes single-person accounts, accounts created for a single individual by an agent, nominee, guardian, custodian or conservator, and accounts created for a sole proprietorship.
Certain Retirement Accounts: Funds invested in retirement accounts, including Individual Retirement Accounts (IRAs), self-managed 401(k) plans, and self-managed defined contribution profit-sharing plans. The FDIC protects these accounts up to $250,000 per depositor per bank insured by the FDIC.
Joint Accounts: Deposits held jointly or by two or more individuals with no beneficiary. Every joint account each co-owner holds in the same insured bank gets added up and covered up to $250,000.
Trust Accounts: Deposits made by one or more holders of either an informal revocable trust, a formal revocable trust, or an irrevocable trust with named beneficiaries. By April 1, 2024, the highest insurance premium for a trust owner with five or more beneficiaries is $1,250,000 per owner.
Computed Retirement Plan Accounts: Savings from a pension plan, defined benefit plan, or other self-directed employee benefit plan. The FDIC insures every plan participant’s interest up to $250,000.
Accounts of Corporations/Partnerships/Unincorporated Associations: Deposits held by corporations, partnerships, and unincorporated associations. Such deposits are insured separately from the individual deposits of the company’s owners, stockholders, partners or members.
Deposit Accounts: Depository accounts held by the United States, any state, county, municipality, District of Columbia, Puerto Rico, other government property and territories, and Native American Tribes. Insurance coverage is provided to the bank that holds deposits.
Examples of FDIC Insurance Coverage
Single Account Example:
Marci Jones has four separate accounts at the same insured bank, one of which is in the name of her sole proprietorship. The FDIC aggregates the four accounts (totaling $260,000) and covers the balance to $250,000 (but $10,000 is not covered).
Certain Retirement Accounts Example:
Bob Johnson has two retirement accounts, each with a different type of fund in the same insured bank. The FDIC pools the deposits in both accounts, totaling $255,000, and insures the amount up to $250,000, leaving $5,000 untouched.
Joint Account Example:
Mary and John Smith hold three separate accounts at the same bank insured by the bank. The FDIC aggregates each co-owner’s interest in all joint accounts and insures each co-owner’s interest up to $250,000. Mary and John each have joint accounts of $330,000, and therefore $80,000 of each deposit is unprotected.
Trust Account Example:
John Jones holds three trust accounts in the same insured bank, with six named beneficiaries. Your insurance limit is 1 owner x 5 beneficiaries x $250,000 = $1,250,000. John does not have $30,000 coverage because his total balance is $1,280,000.
Unique Ownership Scenarios
Pass-Through Deposit Insurance Coverage:
Pass-through deposit insurance is a way of insuring depositors who have their funds held and paid by a third party at an FDIC-insured bank. When certain conditions are satisfied, the money deposited is covered in exactly the same way as if the money were held at the bank by the underlying owner(s). HSAs are covered depending on who owns the account and whether beneficiary names are included.
Health Savings Accounts (HSAs):
When the depositor opens an HSA and has beneficiaries, the FDIC protects the deposit under the Trust Account term. If no beneficiaries are provided, the deposit is insured in Single Account form by the FDIC.
Mortgage Servicing Accounts:
These accounts are owned by a mortgage servicer and consist of principal and interest payments made by the mortgagors. The account is guaranteed to the mortgage investors for the total amount paid into the account by borrowers up to $250,000 per mortgagor.
Frequently Asked Questions
What happens to my funds if my bank shuts down?
When a bank fails, the FDIC quickly secures insured deposits either by selling them to a viable bank or by paying depositors directly for their deposit accounts up to the insured level.
So, what about if two insured banks merge and I end up with deposits at two of them?
When two or more insured banks are merged, deposits at the assumed bank are separated from deposits at the assuming bank for at least six months after the merger. This grace period lets depositors restructure their accounts if necessary.
When an account owner dies, what happens to the insurance? The FDIC also insures an individual’s accounts if they existed six months after the deceased accountholder’s death. Under this grace period, insurance coverage on the owner’s accounts will not change unless the accounts are restructured.
How Does FDIC Insurance Coverage Work or Joint Accounts?
FDIC insurance for accounts that are identified as “joint” work by providing coverage for deposits that are owned by two or more individuals with no associated beneficiaries. The following outlines how this works:
The Requirements
In order for an account that is owned by at least two individuals to be covered, the following requirements will need to be met:
- All of the owners of the account must be alive. Legal entities – such as estates and trusts – are not eligible for coverage at all.
- Each individual owner must have equal rights when it comes to withdrawals from the account.
- All those on the account should have signed the signature card or records that indicate that each person on the account owns said account.
- The determination of the insurance coverage calculation must add up to a total of $250,000 per owner on the account. The FDIC makes the assumption that all of the shares of all of the owners of the account are equal, unless the records associated with the account states otherwise.
- If any of the owners of the account have designated someone as a beneficiary on the account, should they pass away, the account would need to be set up as a Trust Account.
- If an account has more than two owners, the coverage on the insurance is calculated based on each person’s share of the account.
Conclusion
Educating yourself about FDIC coverage is very important for securing your deposits. By knowing what ownership type it falls under and how deposit insurance is calculated, you can ensure your money is completely covered. You can check the FDIC website or contact the FDIC directly for details.
If you are interested in obtaining a FDIC insured account, you may contact us here at Somerville Bank today. We have over 115 years of experience and offer a large assortment of accounts and services to our clients. In addition to individual accounts, we also offer accounts and services to businesses. Examples include credit cards, merchant services, loans, and even identity theft protection.
We have several different locations in and around your area. If you are interested in doing business with us, you may contact one of our financial advisors at one of our many locations. Our accounts and the insurance provided on each supports the stability of the economy by promising that those that own the accounts will not lose money if a bank closure should occur. We believe in maintaining the confidence of the public in terms of bank services and our banking services. Should something happen, you will not have to worry about destabilization. You will not lose your funds.
The stability we offer supports the smoothest operation of the economy by making sure that interruptions are prevented. This comes in both liquidity and credit. We have not had to close any banks. In fact, throughout the years, we have only opened more banks. If you want to open an FDIC insured account, be sure to contact one of our locations near you. Simply click on the following link: https://somervillebank.net/locations/
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