When you deposit money into a bank, you're essentially trusting that the bank will be able to pay it back to you -- with interest in some cases -- when you're ready to withdraw it. But like any other entity, banks can fall on tough times. According to the Federal Deposit Insurance Corporation, two banks have failed so far this year and five failed in 2023.
So how can you trust that your money is safe in your bank? The FDIC helps with that.
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You may have noticed that bank advertisements typically include the phrase "FDIC-insured" or "member FDIC." That means federal deposit insurance will protect your money if the bank fails. Here's how it works and what it does -- and doesn't -- cover.
What is FDIC insurance?
The FDIC is an independent US government agency with three specific jobs:
1. Providing insurance on bank deposits for at least $250,000 per depositor
2. Supervising member financial institutions
3. Managing the resolution of failed banks
What FDIC insurance covers
FDIC insurance covers deposit accounts, such as checking and savings accounts, CDs, and money market accounts.
What FDIC insurance doesn't cover
FDIC insurance is insurance on deposit accounts. Other financial accounts, such as investment accounts, don't qualify for coverage. FDIC insurance also doesn't cover any money or property you have stored in safe deposit boxes.
The type of account your money is in isn't the only limitation of FDIC insurance. The coverage applies only in the case of a bank failure. So if your loss in a deposit account is related to anything else -- such as theft or fraud -- the FDIC won't be responsible for covering it.
Coverage limits
The FDIC insurance coverage limit at most banks is $250,000 per depositor, per bank, per ownership category. Ownership categories include single accounts, joint accounts and trust accounts.
Some banks offer insurance beyond the $250,000 limit deposit sweep programs. Through these programs, financial institutions divide your deposited cash into multiple smaller amounts across multiple FDIC-insured banks. Each separate account can be insured for up to $250,000, increasing your total coverage limit based on the number of accounts your funds are swept across.
You can also do this yourself by limiting your deposits with any FDIC-insured bank to $250,000 per bank. For example, if you have $750,000 to deposit, you could spread your funds evenly across three separate FDIC-insured banks -- depositing $250,000 at each bank -- to ensure that all of your money is covered.
How FDIC insurance works
To get FDIC insurance coverage for your funds, all you need to do is open a deposit account with an FDIC-insured bank. You can use the FDIC's BankFind tool to determine if your bank offers FDIC insurance.
If your bank fails, the FDIC typically does one of two things:
- Open a new account for you: The FDIC may move your money to a new account at another FDIC-insured bank. For example, if you have $100,000 deposited with Bank A, and that bank fails, the FDIC may open a new account for you at Bank B and fund it with the $100,000 you lost when Bank A closed.
- Issue you a check: The FDIC may choose to issue you a check to cover your insured amount. You can then deposit the funds at another financial institution if you wish.
The FDIC typically remedies losses within a few days after a bank failure. However, there may be delays in some cases. For example, if the FDIC opts to issue checks rather than open new bank accounts for insured individuals, it may take additional time to receive your funds. If you have more than $250,000 deposited, the FDIC may take some time to review your assets to determine how much of your losses are covered.
What about credit unions?
What if your money is in a credit union instead of a bank? That's where the National Credit Union Administration comes in. The NCUA offers deposit insurance that's similar to FDIC insurance.
Like the FDIC, the NCUA offers coverage of up to $250,000 per depositor, per credit union, per ownership category. This coverage is limited to deposit account losses resulting from credit union failures. You can find out if a credit union is NCUA insured using NCUA's credit union locator.
The bottom line
FDIC insurance is a type of deposit insurance that can protect you if your federally insured bank fails. If you bank with a federally insured credit union, your deposits are covered by the NCUA. In either case, the money you deposit is covered by the full faith and power of the US government.
It's important to keep in mind that both of these types of insurance have a coverage limit of $250,000 per depositor, per financial institution, per ownership category. So if you have more than $250,000 to deposit, consider spreading your funds across multiple federally insured financial institutions to protect all of your money from potential bank and credit union failures.