When I was growing up, my grandmother kept her cash in a coffee can above the fridge. I never knew how much money was in that old blue Maxwell House tin, but I was always worried that one day it would somehow disappear and her hard-earned savings would be lost.
It wasn’t until I got older that I realized why my grandmother kept her money in that can: eight years before she was born, her parents lost all their savings when their bank failed in the wake of the Great Depression.
Whether my grandmother realized it, her parents’ financial loss shaped her own trust in financial institutions and their ability to keep her money safe and secure. But although depositors in the ’20s and ’30s had reason to fear (whether they realized it then), Americans today can rest easy and continue to make smart money moves in a volatile market thanks to the Federal Deposit Insurance Corporation.
But many of us don’t fully understand what this insurance does and doesn't do for us. So here’s everything you need to know about FDIC insurance.
What is the FDIC?
Founded in 1933, the FDIC is an independent federal agency. It has been providing Americans with peace of mind regarding their bank deposits for nearly a century.
The agency was created by Congress in the wake of the Great Depression-era bank failures — a total of about 9,000 banks failed between the late 1920s and 1930s — when American depositors lost deposits worth an estimated $140 billion in today’s dollars.
Following these failures in 1933, the FDIC was founded to help regain the confidence of depositors and ensure that hardworking Americans never again had to worry about their money disappearing if their bank suddenly went belly up. A year later in 1934, the FDIC introduced its deposit insurance coverage. Since then, no depositor has lost a single cent of their covered funds due to a bank failure.
Why FDIC insurance is important
You’ve probably seen FDIC insurance referenced on your bank account paperwork, in commercials, or on solicitations for new accounts. But there are probably quite a few of us walking around who have no idea what this coverage is for or whom it protects.
According to the FDIC, the purpose of this insurance coverage is to “protect the funds depositors place in banks and savings associations.” If you put your money into a deposit account at an FDIC-insured bank and that bank fails for some reason, you essentially have a government-secured insurance policy that prevents you from taking the brunt of that loss.
Limits on FDIC insurance coverage
As with any insurance policy, there are limitations to the FDIC coverage that may come with your account. For starters, FDIC insurance coverage protects each depositor up to $250,000 per account ownership category, per banking institution. If you have multiple accounts of the same type at the same bank, that insurance limit is applied to your total deposits held there.
Account ownership types are broken out into single accounts, joint accounts, revocable and irrevocable trust accounts, government accounts, and a few others. So if you have three single accounts that you alone own, the $250,000 limit is applied across all three. However, if you have three single accounts and a joint account that you own along with another person, these are in different ownership categories. Therefore, the $250,000 total limit for the single account is separate from your $250,000 limit for the joint account.
Additionally, it’s important to note that not all types of accounts are covered. The types of deposits that are protected by FDIC insurance include:
- Checking accounts
- Savings accounts
- Money market deposit accounts
- Certificates of deposit (CDs)
- Cashier’s checks, money orders, and other official items issued by a bank
- Negotiable order of withdrawal accounts
However, there are some accounts in which your money is not protected. This includes:
- Accounts held at credit unions (these funds are typically protected by National Credit Union Association coverage instead)
- Stocks, bonds, or mutual fund investments
- Life insurance policies
- Safe deposit boxes (and anything you’ve put inside)
- Annuities or municipal securities
- U.S. Treasury bills, bonds, or notes (these are federally backed)
In addition, certain types of account ownership can allow for more coverage. For example, if you have a joint account with a spouse you are each covered for up to $250,000 on that account.
9 common myths about FDIC insurance
There are a handful of myths about FDIC insurance that seem to float around, which can be misleading if you don’t know the facts. Here’s a look at the most common FDIC myths and where the truth lies.
Myth 1: FDIC insurance is actually only up to $100,000
Before 2008, FDIC insurance coverage was limited to $100,000 per depositor, per institution. However, with the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act, this coverage was permanently raised to $250,000. So this is less myth and more outdated information, but nonetheless important to clarify.
Myth 2: FDIC insurance covers my deposits against fraudulent activity/theft
Yes, it’s true you will typically only be responsible for up to $50 in unauthorized electronic funds transfers if your account is reported as being compromised in some way (through fraud, theft, unapproved access, etc.). However, that isn’t your FDIC insurance coverage at work. This coverage is due to the Federal Reserve’s Regulation E.
Myth 3: Each account I have is insured separately
To be honest, this one is both a myth and a truth. Let’s say you keep your money at Acme Bank, where you have a joint checking account, two individual savings accounts, and an individual money market account. If Acme Bank goes under, those account categories will be taken into consideration when determining your FDIC protection.
Your single accounts — the two savings accounts you alone own and the individual money market account — fall under the single ownership category. This coverage is calculated per depositor, per institution, not per account. So you would have $250,000 in FDIC insurance protection for all three combined. However, the joint checking account is insured separately, because it falls into a different account ownership category. As a result, it would receive its own FDIC coverage up to the allowed limit ($250,000 per co-owner, per institution).
As a note, FDIC ownership categories include single accounts; joint accounts; some retirement accounts, such as individual retirement accounts (IRAs); revocable trust accounts; irrevocable trust accounts; employee benefit plan accounts; government accounts; and corporation/partnership/unincorporated association accounts.
Myth 4: If I have three accounts, I have three times the FDIC coverage
This is a continuation of the myth above. Regardless of how many accounts you have at a particular bank or if you opened them at different branches, they will count against your $250,000 total coverage limit for that bank if they fall into the same ownership category. So if you have three of the same type of account at the same bank and all three are owned by you alone, you’ll get $250,000 in coverage total.
You are eligible for additional coverage if you have accounts that fall into multiple ownership categories. In that case, each category total is eligible for $250,000 in protection per owner, per institution. So you owning one joint account and one single account would equate to up to $500,000 in total coverage. However, having multiple accounts does not alone qualify you for additional coverage, especially if they fall into the same ownership category.
Myth 5: If my bank is FDIC insured, every product/account I have there is protected
Just because your bank is FDIC insured — and some of your accounts are protected — doesn’t mean that every dollar you have deposited with that bank is covered. Keep in mind that FDIC insurance is limited to certain account types. So although your checking and savings account might be protected, your investments and life insurance policy held by the same bank would not.
Myth 6: Under no circumstances can an account be protected for more than $250,000 in FDIC insurance coverage
This one might be a bit confusing, given the other debunked myths above and the FDIC’s staunch rule of $250,000 in maximum coverage. However, there are some cases in which an account can be protected for more.
For example, trust accounts can be protected by $250,000 in coverage per beneficiary, as long as they meet certain criteria. So if you and your five siblings are all equal beneficiaries of a revocable trust, and the bank holding that trust goes under, you’ll each be protected by up to $250,000 — for a total of $1.5 million in FDIC deposit insurance.
Along those same lines, a joint account (such as one owned by you and your spouse) would be insured for $250,000 per owner. This would equate to $500,000 total in FDIC coverage — just be sure to keep in mind that all joint accounts held by those same owners at that same institution would go against the insurance coverage limits.
Myth 7: It will take years to get my money back, even if it’s covered by FDIC insurance
There’s an oft-heard myth that the FDIC can take up to 99 years to get your money back to you, even if it’s lost in a covered circumstance. Although the FDIC doesn’t impose strict time limits on itself, it is bound by federal law to get your funds back to you “as soon as possible.” Its goal, according to its website, is to have your insured funds returned within two business days, with the majority of those cases being resolved the next business day.
Myth 8: If my money isn’t FDIC insured, it’s at risk
Although FDIC insurance can give you peace of mind when it comes to your deposits, an account without FDIC coverage isn’t doomed. Credit unions, for instance, aren’t covered by FDIC insurance, but that doesn’t increase their risk. Instead, they’re protected by the NCUA, which also offers a standard $250,000 in coverage per account holder.
Myth 9: FDIC insurance is offered only by traditional, brick-and-mortar banking institutions
These days, online banks are gaining traction and have developed a strong reputation. For many years, though, these internet-based institutions were met with suspicion and caution, especially by those who were accustomed to brick-and-mortar banks. But some of the best banks are online banks.
It’s true the traditional banking institutions that have become household names over the years are almost all FDIC insured. But most online banks are too. So even if you’re skeptical about depositing your funds in a bank that doesn’t actually operate out of a building, you can rest assured the same coverage can still apply to your money if you choose an FDIC-insured institution.
How to calculate your FDIC coverage
The easiest way to calculate your FDIC coverage is to use the FDIC's Electronic Deposit Insurance Estimator. Called EDIE for short, this estimator allows you to calculate the total amount of insurance coverage available for your personal accounts, including single and joint bank accounts, retirement accounts, business accounts, and even deposits held by public unions.
You will need your bank name, details about the type of account you have, your account balances, and the type of deposits you've made in order to use EDIE to calculate your FDIC coverage.
Is it safe to have all your money in one bank?
As long as the bank is FDIC insured and the total amount of money you have deposited does not exceed the FDIC insurance limit, then your money will be covered in the event that the institution ceases to exist. That FDIC limit is $250,000, but it applies to all your combined accounts at a single financial institution. So you can't open multiple checking accounts at the same bank to get $500,000 in insurance coverage.
Are joint accounts FDIC insured to $500,000?
The FDIC insurance limit is per depositor. As a result, if you have a joint account, each depositor is insured up to $250,000. Therefore, the aggregate insurance coverage for the joint account is $500,000.
How does FDIC insurance work with a trust?
FDIC insurance provides coverage to trusts, but the rules differ depending whether the trust is revocable or irrevocable.
A revocable trust must meet three criteria to be insured. It must use specific language to make clear it is a trust, such as living trust or family trust. Trust beneficiaries must actually have a legal interest in the trust at the time the trust fails. And the trust beneficiaries must either be living individuals or a charity or nonprofit organization.
An irrevocable trust must meet four criteria. It must be valid under state law, the bank deposit records must disclose that a trust relationship exists, the trust's beneficiaries and their legal interest in the trust must be identifiable, and the beneficiary's interest in the trust must be non-contingent.
Most of us think back to the Great Depression as a financially devastating time period, and it was for so many people. But thankfully, the failure of 9,000 American banks has resulted in a system we can still rely on today.
We can rest easy when we put our paycheck in one of the best savings accounts, thanks to the existence of the FDIC and its insurance coverage. Although there are some limitations, FDIC insurance gives most depositors the peace of mind they need to know their money isn’t going to disappear tomorrow, no matter what happens to their financial institution(s).