What does it mean if an account is “FDIC insured”? I have questions.
Updated: Aug 28, 2019
What is the FDIC? The Federal Deposit Insurance Corporation (FDIC) is an agency of the US government that protects the funds depositors place in banks and savings associations.
Why was the FDIC created? The stock market crash of 1929, which precipitated the Great Depression, caused people to go to their banks and attempt to close their accounts in the hopes walk away with their cash (called a bank run). Because of their business model, banks don’t keep enough cash on hand to meet all obligations. The amount banks must either have on hand or deposited at the central bank, the reserve requirement, is set by a central bank. When the bank run occurred in 1929, the banks didn’t have enough cash and 1/3 of banks failed. Congress passed The Banking Act of 1933, which included deposit insurance, to stabilize the system and keep bank runs from happening by boosting depositors’ confidence.
Which accounts are covered? Accounts that are covered include: checking accounts, savings accounts, money market deposit accounts, negotiable order of withdrawal accounts, and certificates of deposit. Also covered are cashier’s checks and money orders. The coverage is $250,000 per depositor, per insured bank, for each account ownership category, if the institution is FDIC-insured. You can search to see if your financial institution is FDIC-insured here.
What’s not covered? Stocks, bonds, mutual funds, life insurance policies, annuities, municipal securities, and safe deposit boxes.
What are the ownership categories? Brace yourself, these get a little technical. Also note that you should seek out financial advice on these matters.
· Single Accounts: a deposit owned by one person. Accounts held in the name of a sole proprietorship are insured under single account deposits of the owner. If the owner of a single account has designated one or more beneficiaries who will receive the deposit when the account owner dies, the account would be insured as a Revocable Trust Account.
· Certain Retirement Accounts: IRA’s, self-directed 401(k)’s, and others (if an account is not self-directed, then would be insured under Employee Benefit Plan Accounts).
· Joint Accounts: a deposit owned by two or more people, where each owner has equal right to withdraw. The balance of a joint account can exceed $250,000 and still be fully insured. Each owner is insured up to $250,000. For example, if the same two co-owners jointly own both a $400,000 CD and a $100,000 savings account at the same insured bank, the two accounts would be added together and insured up to $500,000.
· Revocable Trust Accounts: a deposit account owned by one or more people that identifies one or more beneficiaries who will receive the deposits upon the death of the owner(s). If the accounts meet the criteria (not listed here), the owner of a revocable trust account is insured up to $250,000 for each unique beneficiary with equal interest, into the millions.
· Irrevocable Trust Accounts: deposit accounts held in connection with a trust established by statute or a written trust agreement in which the owner contributes deposits or other property to the trust and gives up all power to cancel or change the trust. (If the owner retains an interest in the trust, then the amount of the owner’s retained interest would be added to the owner’s other single accounts, if any, at the same insured bank and the total insured up to $250,000.)
· Employee Benefit Plan Accounts: a deposit of a pension plan, defined benefit plan or other employee benefit plan that is not self-directed. To determine the maximum amount this employee benefit plan can deposit at one bank and ensure all the funds are fully covered, $250,000 should be divided by the percentage share of the plan participant with the largest interest in the plan.
· Corporation/Partnership/Unincorporated Association Accounts: Deposits owned by corporations, partnerships, and unincorporated associations, including for-profit and not-for-profit organizations, are insured under the same ownership category. These are insured separately from the personal deposits of the organization’s owners, stockholders, partners or members.
· Government Accounts: Federal, state, and tribes
The more I read, the more confused I got. Let’s look at an example, using single, joint, retirement accounts, and revocable trusts:
The insurable amount is $250,000 per depositor, per account category, per institution:
· Andrew’s Single Account Category Total: $40,000 + $100,000 = $140,000
· Lindsey’s Single Account Category Total: $15,000 + $90,000 = $105,000
· Andrew’s Joint Category Total: $250,000/2 + $45,000/2 = $147,500
· Lindsey’s Joint Category Total: $250,000/2 + $45,000/2 = $147,500
· Andrew’s Certain Retirement Accounts Category Total: $100,000
· Andrew’s Revocable Trust Account Category Total: $25,000
· Lindsey’s Revocable Trust Account Category Total: $25,000
All deposits in this example are fully insured.