As with any other type of insurance, it’s important to understand the purpose and protection of deposit insurance. Even children are admonished to only put their money in accounts protected by FDIC, but what exactly does that mean? As complicated as it might sound, it is quite simple to understand when it is broken down into sections.
FDIC background: An independent agency of the United States government, the FDIC (Federal Deposit Insurance Corporation) protects funds placed by depositors into FDIC-insured banks and savings associations. The Federal government backs up the insurance. No depositor has lost money covered by the insurance since the FDIC’s establishment in 1933.
Accounts and amounts covered: Covered accounts include checking and savings, CDs, and money market deposit accounts. A maximum of $250,000 insurance is available for each depositor per insured bank, under each account ownership category.
Insured deposits according to ownership: Deposits at the same bank with different ownership categories are separately insured up to at least $250,000. Living trusts and other types of revocable trust accounts may have more than one unique beneficiary named. For example, if the owner designated two unique beneficiaries, the amount of insurance could be as much as $500,000.
Exclusions: Additional financial services and products offered by banks are not covered. This includes:
- mutual funds.
- life insurance policies.
- securities and annuities.
- stocks.
- bonds.
How deposit insurance works: No application is needed to qualify for FDIC deposit insurance. Simply open a qualified account at an FDIC-insured bank and keep the balance at $250,000 or less for each ownership category. Its value is recognized in the event a bank fails.
Detailed guidelines specify how much a depositor receives if an FDIC-insured depository institution fails. Insurance pays the depositor the account principal plus earned interest through the date of default up to the $250,000 limit for single ownership accounts.
Amount of time before payment is made: Insurance is normally paid the following business day after a bank closes. The FDIC may set up an account for the depositor at another FDIC-insured bank for the amount insured at the failed bank. It may also give a check to the depositor for the insured balance.
Certain accounts may require a review to establish the amount covered. FDIC also sells and collects the failed bank’s assets to settle its debts, including uninsured funds of depositors. Those claims require additional time to settle and typically result in a pro-rata settlement.
Not all financial institutions and products are covered by FDIC. Inquire about coverage before opening an account. For additional information, talk to your bank representative or access the FDIC website.
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