If you live or bank in the United States, you've probably seen the phrase "FDIC-insured" when opening a savings account or logging on to your bank's website. Have you ever wondered what this term means? What is the FDIC, and what protections does FDIC insurance provide?
FDIC stands for Federal Deposit Insurance Corporation, a government agency that was created in 1933 at the height of the Great Depression. Back then, banks were failing at an alarming rate, and consumers had begun to lose confidence in banks as an institution. To restore public trust, the federal government created an agency to insure bank deposits. In other words, if an FDIC-insured bank fails, the government ensures that its customers get their money back.
The Basics of FDIC-Insured Accounts
FDIC insurance reduces the risk to bank customers by guaranteeing that they will get their money back if a bank fails -- regardless of whether the bank has enough remaining assets to cover the cost. FDIC-insured accounts are therefore considered extremely low-risk.
The standard FDIC insurance covers up to $250,000 per customer, account type, and bank. This means that if you have more than $250,000 in an individual account, only the first $250,000 is protected by the FDIC. However, you can increase your total FDIC insurance by spreading money across different account types and banks. For example, if you had two savings accounts at two different banks, each account would be insured for up to $250,000.
Not all banks or account types are covered by FDIC insurance. Your bank will tell you whether a specific account is covered, but for additional reassurance, you can contact the FDIC directly. The FDIC's website includes a tool for calculating coverage, called the Electronic Deposit Insurance Estimator. In addition, you can contact the FDIC through their customer support page or by phone.
Although it's rare, there have been cases of banks fraudulently claiming FDIC insurance for non-FDIC-insured accounts. Therefore, if you have any hesitation about whether an account is truly insured, it's best to contact the FDIC directly.
Even if some accounts at your bank are FDIC-insured, other accounts might not be. It's common for banks to offer a mix of FDIC-insured and non-FDIC-insured products.
FDIC commonly covers checking and savings accounts. Some retirement accounts, trusts, certificates of deposit, and prepaid cards are also covered by FDIC insurance. However, insurance varies from bank to bank, so it's always important to check that the specific account you are considering is insured.
If an account is FDIC-insured, customers are automatically protected by that insurance. Bank customers never need to purchase, pay fees, or sign up for FDIC insurance.
Limitations of FDIC Insurance
FDIC Insurance doesn't apply to all account types. It is intended to protect deposit accounts like checking and savings accounts, and it doesn't protect most non-deposit investments. Stocks, bonds, and mutual funds are not typically covered by the FDIC (although they may be protected by alternative forms of insurance).
Safety deposit boxes are also not protected by the FDIC, even if they are located in a bank that provides FDIC-insured accounts. If a safety deposit box is robbed or destroyed, the FDIC will not reimburse any of the losses.
Even for FDIC-insured accounts, the only event that FDIC insurance protects against is bank failure. Other losses -- such as bank robberies, hacked online-banking accounts, or lost prepaid cards -- are outside the purview of the FDIC. These losses might be covered by other insurance or bank policies, but they will never be reimbursed by the FDIC.
What if a Bank Fails?
These days, bank failures are rarer than they were when the FDIC was established. The vast majority of bank customers will never have to worry about using FDIC insurance. However, in the unusual event that a bank does fail, customers can rest assured that the FDIC will quickly restore their money.
Typically, the FDIC sends payouts to account holders the very next business day. Occasionally, payouts take several days, and for very complex accounts like trusts, can take even longer. The FDIC sends the payments by check or by transferring funds into a new FDIC-insured account at a different bank.
Although the FDIC only guarantees payments up to the insured $250,000 per account, in some cases, customers will even receive reimbursements for non-insured losses. After a bank failure, the FDIC takes control of bank assets and sells them off to pay the bank's creditors, including these uninsured bank accounts. However, these reimbursements are limited to the worth of the bank's assets and are affected by how many other creditors the bank has.
Conclusion
When choosing a deposit account in the United States, FDIC insurance is an important consideration. It's a powerful tool for increasing consumer confidence and lowering the risk of deposit accounts. This insurance doesn't protect all investments or against all types of losses. However, it does provide peace of mind that if your bank fails, your money won't disappear. The FDIC guarantees that you will be able to recover your insured deposits.