How Does FDIC Deposit Insurance Work With Bank Accounts?

When you put your hard-earned money in the bank, you want to know that it will be as safe as possible.

One concerning scenario is that the bank shuts down or fails and you're left wondering what happens to the money that you've saved up.

Thankfully, your money won’t just disappear if a bank fails. Deposit insurance protects depositors and the assets kept in banks--but up to certain limits.

So if this is the first time you’ve heard of it, learn how deposit insurance works, what it does/doesn’t protect, and (most of all) if it costs anything.

What is the FDIC?

The FDIC is the Federal Deposit Insurance Corporation, a government-backed agency that offers federal insurance coverage to all the money deposited in banks.

Formed via the Banking Act of 1933, the FDIC established a system to protect bank deposits in the midst of the Great Depression for three reasons:

• To rejuvenate banking viability in the U.S. during that financially bereft period
• To reduce the number of bank failures
• To avoid deposits from being completely wiped out by a financial crisis

So, in the event that your bank goes under, the FDIC has got your back (financially speaking, of course) by ensuring that all your money isn’t lost.

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How FDIC Insurance Works

If your bank was to fail, your first thought upon hearing the news might be to hurry to your local ATM, make an emergency withdrawal and clean out your savings or checking account before the money disappears completely forever.

Your mattress now becomes your new place to stash your cash before finding a new bank.

FDIC insurance prevents this problem from happening because it insures up to $250,000 per account ownership type per depositor.

Covered accounts include checking, savings, certificates of deposit, and money market accounts.

Note: Assets that aren’t covered include physical items stored in safety deposit boxes or bank vaults, or investment-type products such as stocks or bonds. Only cash deposits apply. FDIC insurance also only covers bank failures, not crimes, like bank robberies, fraud, identity or account theft.

Online banks are covered under FDIC insurance, too.

Your bank doesn’t need to have any physical branches in order to be covered, but if you’re thinking of opening an online checking or savings account, make sure to check first that the bank is backed by the FDIC.

Credit unions, on the other hand, aren’t protected by the FDIC.

As nonprofit financial providers independent from the traditional mass banking system, that doesn’t mean you’re out of luck if you bank with one.

Their version of the FDIC is the NCUA -- the National Credit Union Administration. The NCUA also offers up to $250,000 in deposit insurance coverage, with the same details, guidelines and limits through the NCUSIF.

In any case, bank or credit union, check first to see if a financial provider you’d like to bank with is a member of either the FDIC or NCUA.

If not, your money may be put at risk. It doesn’t matter how big or small your bank is; if it’s a member of the FDIC or NCUA, your money is covered.

Going Over the Limit

With deposit insurance, you don’t need to file a claim or even pay for the premiums.

That’s taken care of by your bank, who ultimately pays for FDIC protection. Should losses occur, the insurance automatically has you covered.

But like other types of insurance, there are limits to keep in mind. The FDIC insurance limit was previously $100,000, and was raised to $250,000 during the Obama administration.

Originally a temporary move, that limit increase has since remained in place.

According to the FDIC, the standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

That doesn’t mean $250,000 of coverage times three, or $750,000, but up to $250,000, whether your money is in one account or several.

For example, you keep (at the same bank):

• $250,000 in a high-yield savings account
• $250,000 in a money market account
• $250,000 in a jumbo CD

Only $250,000 of the $750,000 in combined funds at the single bank will be insured by the FDIC.

Also, deposits held in different divisions of the same bank holding company are combined when calculated towards the limits.

If a brick-and-mortar bank happens to have an online banking division (it may go by a different brand or name), the combined funds are counted against the $250,000 limit.

So, the $250,000 total insurance coverage is there to protect you (the depositor/account holder), all of the money you have at that single bank, and the total limit amount spread across multiple qualifying accounts.

If you had additional money in other accounts, like trusts or bonds, the FDIC wouldn’t cover it.

Note: Some financial institutions may be partnered with multiple deposit holding companies to spread out a single customer's deposits. This may increase your deposit insurance coverage.

Can You Increase FDIC Coverage?

Generally, the FDIC’s $250,000 limit is set until Uncle Sam grants an increase. But there are some instances when you may be able to obtain more insurance coverage.

If you hold a joint account with a spouse or family member, you may be eligible for more than the standard $250,000 coverage, since there are two account holders.

Similarly, if you or your joint account holder have your own individual deposit accounts plus the shared account, you’d receive insurance coverage on each one (two accounts equals $500,000 FDIC insurance, three accounts equals $750,000).

As always, check with your bank -- a teller, banking representative or customer service -- to see how much insurance you may be in store for if you have these circumstances.

If you’re flying solo and only have one savings account, in your name, you can plan strategically where you put your money to increase your FDIC insurance.

How to insure more of your deposits

Now, if you have a cool million dollars in your savings account, that’s probably not a good idea.

Anybody with that kind of money is served best by diversifying their deposit and investment streams to maximize their earnings.

The same goes for FDIC insurance. Say you’ve got a life savings of $600,000 in one account.

If your bank fails, you’re covered for $250,000, but the rest of the $350,000? It is uninsured and unprotected -- you could lose the rest. There are ways to cover all your deposits.

Divide your money across multiple banks

Deposit insurance coverage doesn't combine across different banks. So, you can divide your money across many banks to ensure that all of your money is covered.

Use multiple types of ownership accounts at the same bank

You can have a personal account, joint account, retirement account, trust account, and more at a single bank. Each type of account ownership is separately covered up to $250,000.

Use a bank that uses multiple depository institutions

Again, some banks and financial companies use more than one deposit-holding institution to hold its funds.

What to Do If Your Bank Fails

Don’t worry -- you don’t need to be bracing yourself for it. Your bank won’t likely be failing anytime soon, and if it did, you’d be covered with FDIC insurance.

Banks saw a plethora of FDIC assistance within the last few decades, including the financial crisis of the late 1980s and early 1990s and again during the mortgage bubble burst in 2008 with nearly 500 banks failing.

There were five bank failures nationwide in 2016, and seven so far this year, amounting to billions of dollars in losses.

And the bad news is that the FDIC isn’t required to notify you, so a bank failure could come as a surprise.

If so, just keep calm and contact the FDIC.

They should be able to run you through the steps to take to retrieve your insured funds (which, after reading this article, should be every cent you have if you’ve made sure to diversify your account streams).

Generally, when a bank fails, it’s like a house going into foreclosure. The bank will try to sell off assets of value, like outstanding loans and open deposit accounts, to another bank who can buy out your struggling bank and save the day.

Barring that, the FDIC will step in, its insurance will kick in, and depositors are reimbursed their insured money, usually by check or direct deposit.

Then, it’s up to you to re-deposit your dollars with a new bank, credit union or financial provider.

Conclusion

Some key takeaways:

Make sure your bank (or future deposit holder) is FDIC or NCUA insured

This will guarantee coverage up to $250,000 on each of your qualifying deposit accounts.

Consider private deposit insurance

The odds of retrieving uninsured deposit funds is unlikely after a bank failure; according to sources, the average of 72 cents per dollar is hardly three-quarters of your deposit balance.

Private insurance will cover you, but it can cost you; first, look for a bank covered with federal insurance protection.

Diversify your deposits

Spreading your funds across several accounts means FDIC insurance acts like a blanket, covering them in full.

This ensures that a. You don’t exceed $250,000 on one account, and b. That you receive the full benefit of FDIC insurance.

Keep abreast of financial news

Stay aware of what the banking industry is doing, and more specifically, if your bank has been in the news.

If things look risky, consider switching banks to avoid the possibility of being involved in a bank failure.

To find out if your bank is covered under the FDIC, use this tool to locate FDIC-insured institutions in the U.S. And to find the right bank account (FDIC insured, of course) from a list of over 30,000 accounts from 6,000 banks, use a personalized quiz to identify the one that best matches your lifestyle and financial behavior.