9 Common Misconceptions About FDIC Insurance That Could Cost You

Many people lost all their savings when their banks failed in the wake of the Great Depression. This caused a shift in how people protected their money for those who went through it.

But although depositors in the '20s and '30s had reason to fear, 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 people don't fully understand what this insurance does and doesn't do for them. So here are the biggest myths about FDIC insurance.

Founded in 1933, the FDIC is an independent federal agency. It has helped Americans eliminate money stress regarding their bank deposits for nearly a century.

Congress created the agency in the wake of the Great Depression-era bank failures — about 9,000 banks failed between the late 1920s and 1930s — when American depositors lost an estimated $140 billion in today's dollars.

Americans never again had to worry about their money disappearing if their bank suddenly went belly up. Since 1934, no depositor has lost a single cent of their covered funds due to a bank failure.

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.

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.

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.

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So this is less myth and more outdated information, but nonetheless important to clarify.

Yes, it's true that you will typically only be responsible for up to $50 in unauthorized electronic funds transfers if your account is reported as compromised (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.

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.

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).

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.

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 where an account can be protected for more.

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.

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." 

According to its website, its goal is to return insured funds within two business days, with the majority of cases resolved the next business day.

Pro tip: You'll never have to worry about keeping more money in your bank account, up to the FDIC coverage limits, if you're using the right bank account.

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.

While online banks are gaining traction, internet-based institutions were met with suspicion and caution for many years, especially by those accustomed to brick-and-mortar banks. However, some of the best banks are online banks.

It's true that 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 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.

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.

To use EDIE to calculate your FDIC coverage, you will need your bank name, details about your account type, account balances, and deposits.

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 checking account or savings account, 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).