Nothing strikes fear into the financial system like news of bank runs. We’ve had several major institutions go through meltdowns in the past few weeks. Because of this, there is a renewed interest in understanding whether our individual deposits are safe. This is where it’s important to understand how the FDIC works.
Although bank failures are rare and justifiably grab the headlines, the dearth of failures is due in part to the fact that the banking system is backed by the Federal Deposit Insurance Corporation, or what is known as the FDIC. The FDIC was created in 1933 to offer stability to the banking system after the Great Depression, a time when many bank failures left their depositors unable to keep their deposits in several states. The legislation gave the FDIC not only the ability to insure deposits (originally the insured limit was $2,500) but also to regulate banks nationally. The reassurance that deposits were secured, along with the FDIC’s requirement that banks take steps to prevent runs, helped contain bank failure crises.
Are my deposits covered?
The FDIC coverage level is 100 times what it was in 1933. Most depositors can rest easy now that the insurance level is $250,000. The standard insurance amount is $250,000 per depositor, per insured bank, for each category of account ownership . According to the FDIC’s “Guide to Insurance at a Glance,” this is not insurance you should apply for. “Coverage is automatic when a deposit account is opened at an FDIC-insured bank or financial institution.”
What if I have more than $250,000 in deposits?
So let’s break down the concept of $250,000 per depositor, per insured bank, for each property category. “Per depositor” depends on the number of account owners. One account owner means $250,000 is covered. If you jointly own it with another person, that could mean $500,000 total coverage for that account. For example, if you’re married, you can each have $250,000 separately and you can own $500,000 in a joint account, bringing your total coverage to $1,000,000.
“To an insured bank” is clear. As more and more consumers use online banks to get a higher return on their savings, I think researching your bank’s insurance protection is imperative. You can check the financial institution by visiting the FDIC online and searching for the bank. If your deposits are in a credit union, similar insurance is offered by the National Credit Union Stock Insurance Fund. You can determine if a credit union has coverage by visiting MyCreditUnion.gov.
“For any property class” refers to the fact that FDIC insurance goes beyond ordinary savings and checking accounts. It also includes certificates of deposit, money market deposit accounts, and even cashier’s checks. This means that if you hold multiple accounts at one institution, it can multiply your level of coverage. An easy way to calculate for you how much FDIC coverage you have is to use this calculator offered by the FDIC.
What if my deposits exceed the coverage amount?
Once you understand the 3 criteria listed above, you can try strategies like having multiple account types and multiple ownership methods to expand your coverage. Be careful when doing this. Changing ownership of large accounts may result in the need to file a gift tax return. Additionally, a change in ownership can have unintended consequences for estate planning.
Note that you can always extend coverage by opening accounts at another institution. There are also products like the Deposit Account Registration Service, or CDARS. Services like CDARS give you access to multiple banking institutions in one bank.
Breaking news is not necessarily a reason to withdraw all your money from your bank(s) and shove it under your mattress. (Besides the inconvenience and lack of interest, money under the mattress isn’t exactly safe either. Dangers include things like theft and fire.) Instead, consider taking reasonable steps to make sure your money is adequately insured.