When events like Silicon Valley Bank (SVB) and Signature Bank happen, it’s natural to wonder how a bank safeguards your funds. Fortunately, the Federal Deposit Insurance Corporation (FDIC) insurance was designed for this very reason: to help protect your funds once deposited.
What Is FDIC Insurance?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the federal government that provides insurance coverage to banks and their depositors. The FDIC was created in 1933 in response to the banking crisis of the Great Depression, when many banks failed and depositors lost their money.
In the event of a bank failure, the FDIC provides depositors with an insurance payout of up to $250,000 per depositor, per institution, and per ownership category. If your bank is an FDIC-insured institution, you don’t need to apply for FDIC insurance because coverage is automatic.
How does FDIC Insurance Work?
FDIC insurance protects depositors in the event that their bank fails. If your bank fails, the FDIC will step in and pay you back the amount you had in your account, up to the insurance limit.
The FDIC insurance covers traditional deposit accounts of up to $250,000 per depositor. These traditional deposit accounts include the following:
- Checking accounts
- Savings accounts
- Certificates of deposit (CDs)
- Money market bank deposit accounts
- Prepaid cards (assuming they meet all FDIC requirements)
In addition, the FDIC also insures retirement accounts in which plan participants have the right to direct how they invest the money, including:
- Traditional or Roth Individual Retirement Accounts (IRA) savings accounts
- 401(k)s or other self-directed defined contribution plans
- Section 457 deferred compensation plan accounts, whether self-directed or not
The FDIC may also insure an employee benefit plan that is not self-directed, such as a pension plan.
FDIC Insurance Limitations
Now that we understand what FDIC insurance covers let’s also look at what it doesn’t cover. The FDIC states that it does not cover the following:
- Mutual funds
- Life insurance policies
- Municipal Securities
- Safety deposit boxes or their contents
- US Treasury bills, bonds, or notes
Keep in mind, is that FDIC insurance does not protect against losses due to changes in the value of stocks, bonds, mutual funds, or other investments held by a bank. It also does not cover losses due to fraud or theft (which are typically covered by other types of insurance).
FDIC Insurance and You
As mentioned above, the FDIC insures up to $250,000 for a single or joint account per depositor; This means that you can have either one account or multiple accounts at the same bank, but only $250,000 may be insured.
The FDIC’s insurance coverage is free to bank customers and is backed by the full faith and credit of the U.S. government. The agency is able to provide this protection through premiums paid by banks, not by taxpayers.
But some strategies may enhance your coverage. Hypothetically, you could set up a revocable trust and identify one or more beneficiaries to possibly increase your coverage. Each beneficiary may receive $250,000 of coverage. For example, a revocable trust account with one owner that names three unique beneficiaries can insure themselves up to $750,000.
Remember, using a trust involves complex tax rules and regulations. Before moving forward with a trust, consider working with a professional familiar with the rules and regulations.
What You Should Look For in a Bank
When choosing a bank, it’s important to make sure that it is FDIC-insured. A handy tool on the FDIC website is: Bank Find Suite. This tool allows you to independently verify to see if a bank is FDIC-insured.
It is also important to pay attention to the bank’s financial stability. While FDIC insurance is designed to protect depositors in the event of a bank failure, it’s always better to choose a bank that is financially sound and less likely to fail in the first place.
FDIC insurance is an important tool for protecting your money in the event of a bank failure. By understanding how FDIC insurance works and choosing a financially stable bank that is FDIC-insured, you can have peace of mind knowing that your hard-earned cash is safe and secure.
As a financial professional, I always encourage my clients to prioritize the safety of their money, and FDIC insurance is a key part of that equation.