What You Need to Know About the FDIC
With all of the bank failures since the 2008 financial crisis, more consumers are asking questions about the FDIC and what it does. Many consumers have a vague idea that the FDIC protects their money if a bank goes down, but the other details might be fuzzy.
If you want to make sure that all of your money is protected adequately, it helps to know how the FDIC works and what kinds of deposits are covered. (See also: Why I Like Big Banks)
Brief History of the FDIC
Between 1929 and 1933, thousands of banks in the United States failed. At that time, when banks failed, all the money customers had deposited was lost. Estimates put the losses to depositors during this period at about $1.3 billion.
In response to the banking crisis, and in order to help build confidence in the U.S. financial system, the Banking Act of 1933 was passed. As part of this legislation, the Federal Deposit Insurance Corporation (FDIC) was created.
At first, the FDIC was a temporary government corporation. However, in 1935, another Banking Act made the FDIC permanent and set the protection level at $5,000. Through the years, the limits have been increased. Following the events of 2008, the insured limit has been raised to $250,000.
How the FDIC Works Today
Banks that wish to have their deposits insured by the FDIC pay an insurance premium. The FDIC provides the insurance. Since 1991, banks have had their premiums based on risk — much like other insurance policies. If a bank looks like a higher risk of failure, it is assessed a higher premium.
If an insured bank fails, the FDIC either finds another bank to take over the failed institution and run it (preserving the consumers' accounts), or the FDIC sends money to the depositors who are entitled to their cash. Usually, these transitions happen fairly smoothly, and the FDIC is generally prompt about issuing replacement funds when necessary.
When a failed bank is taken over by another bank, it's important that you pay attention to the new account terms. Interest yields may not be the same with the new bank, or there might be a fee attached to the account. If you aren't happy with the new bank, you can withdraw your money and open an account at a bank you like better.
The current structure of the FDIC includes seven divisions, with the agency overseen by a five-member Board of Directors. The Chair of the Board is a presidential appointee, subject to approval from the Senate.
What Types of Accounts Are Insured by the FDIC?
It's important to note that the FDIC doesn't insure all accounts that you hold at a bank. The types of accounts that are covered by FDIC insurance include:
- Money market deposit (but not money market mutual funds)
- Certificates of deposit
- Individual Retirement Accounts
- Revocable and irrevocable trusts
- Negotiable Order of Withdrawal (interest bearing accounts with check-writing privileges)
Some types of accounts, like Coverdell ESAs, are insured as trust accounts. A Coverdell account is considered an irrevocable trust account. A Health Savings Account might be classified as a single savings account or as a revocable trust account, depending on whether or not you include beneficiaries.
Not every type of account is covered by the FDIC — even if you open the account at an insured bank. Stock market investments, municipal securities, bonds, mutual funds, life insurance policies, and annuities are not covered by FDIC insurance. If you lose money because of these accounts, you can't get help from the FDIC (although there may be other insurance to protect you).
Understand that FDIC protection only applies to bank failures. If your money is stolen, or if something you kept in a safety deposit box is destroyed, you won't receive protection from the FDIC. Instead, you should check with your bank to see what kind of protection it has purchased against theft and natural disaster.
How to Protect More Than $250,000
When you open an account, you should check to see how your account will be qualified, and make sure that you understand the rules. There are five categories that the FDIC classifies accounts into:
- Single Accounts
- Joint Accounts
- Qualifying Retirement Accounts
- Revocable and Irrevocable Trusts
- Government Accounts
Knowing these five categories can help you get around the $250,000 protection limit.
FDIC protection applies to all of the accounts you have at the same bank. If you have $150,000 in a single savings account, and another $150,000 in an HSA classified as a single savings account at the same bank, only $250,000 of the $300,000 is covered, leaving the remaining $50,000 vulnerable.
One way to get around this is to spread your accounts around various banks. That way, you don't have a large concentration at just one bank. This can become difficult to manage, however.
If you want to keep more money at one bank for simplicity, realize that the FDIC will cover up to $250,000 in each category. If you have a trust account, a single savings account, and an IRA at the same bank, you can receive up to $750,000 in FDIC coverage. As long as you pay attention to categories, you can increase the amount of money you keep at a single bank.
It's also worth noting that joint accounts receive increased protection, since each person is eligible for the coverage. So, if you have a joint checking account with your spouse, it is covered for $500,000. This can dramatically increase the amount of money covered by the FDIC.
What About Credit Unions?
Credit unions aren't covered by the FDIC. Instead, there is a different organization, the NCUA, that insures credit unions against failure. The coverage limit of $250,000 is the same, and many of the rules are similar. If you keep your money at a credit union, you should check for NCUA insurance.