Your Personal FDIC Insurance Explanation Guide
Written by
Bob Haegele
Edited by
Katie Wudel
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The collapse of Silicon Valley Bank brings to mind the stock market crash of 1929 and the ensuing Great Depression, which created financial chaos in the United States. During this time, many banks failed, and with no guarantees that their money would be safe, there were many bank runs around the country. As a result, the government put safeguards in place to prevent such calamitous scenarios in the future.
Learn: The 15 Biggest Bank Failures in US History
One of those protections was the creation of the Federal Deposit Insurance Corporation (FDIC), an independent federal agency that guarantees consumers’ deposits should banks fail. That guarantee has allowed banking customers to have peace of mind, thus ensuring stability in the banking industry.
What Is FDIC Insurance?
FDIC insurance guarantees deposited funds in the event of a bank failure. Currently, the FDIC insures up to $250,000 per depositor, per ownership category. This means that even if your bank becomes insolvent and can no longer disburse the money you have deposited, the FDIC will nonetheless guarantee those deposits up to the limit.
When people know their money is safe and will be there when they need it, they typically won’t run to the bank and frantically withdraw it. Or, as Ben McLaughlin, president of SaveBetter.com put it, “Knowing your money is safe with all US institutions that offer deposit products allows you to focus on other things that may be important to you; whether that’s the interest rate or type of savings product offered, fees, or if the institution’s values align with your own and what communities they invest in.”
FDIC Insurance Requirements
In order to be FDIC-insured, your account must be held at a bank that is an FDIC member. These member banks must prominently display their membership at teller windows. You may have also heard radio ads for financial institutions that say “member, FDIC” at the end.
In addition, only certain types of accounts are covered by FDIC insurance. Your account must be one of those types in order to be protected by the FDIC. Such account types include checking, savings, money market accounts, and certificates of deposit (CDs).
There is also a lengthy process when banks want to become FDIC members. This was explained by Philippa Girling, former chief risk officer at Varo Bank. Banks must meet with the Office of the Comptroller of the Currency (OCC), the federal reserve board, and the FDIC. The process takes about three years.
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Multiple Accounts & Joint Accounts
Recall that the FDIC covers up to $250,000 per depositor, per ownership category. This means that if a single person has multiple accounts at the same bank, the total amount in all of their accounts is covered for up to $250,000. So if they have a checking account, a savings account, and a money market account which have a total value of $350,000, that person will have $100,000 that isn’t FDIC-insured.
But there is an easy solution to this problem. These limits only apply to each bank, meaning that if our person moves $100,000 to another bank that is an FDIC member, the full $350,000 will now be covered. With joint accounts, each owner is insured for the full amount. For example, if a married couple has a joint savings or checking account, they are insured for up to $500,000 in their joint account(s).
Or we can take this one step further. With a combination of individual and joint accounts, you can have up to $1 million insured at one bank for one household, says Gary Zimmerman, CEO of MaxMyInterest. “Example: Alex could have an individually-titled account with $250,000 of coverage, Sam could have an individually-titled account with $250,000 of coverage, and Alex and Sam could have a jointly titled account with $500,000 of coverage since a joint account is a different ownership category for which Alex and Sam would each be entitled to $250,000 of coverage over-and-above the coverage to which they are entitled on their individually-titled accounts.)”
Why Do I Need FDIC Insurance?
While you might think your bank will never fail, it does happen, albeit on rare occasions these days. There were four bank failures in 2020; in 2010, there were 157. The chance that any given bank will fail is relatively low, but there is no fee to keep your money with an FDIC member. Thus, it is a wise decision to keep your money somewhere it will be safe if your bank becomes a rare failure in the history of our country.
“Read the fine print,” says Gabe Krajicek, chief executive officer at Kasasa. “If the fintech payment provider you are using doesn’t have FDIC insurance, be careful: Use an FDIC-insured account to fund your payment account, only store enough money to transact your specific needs, and pull your balance down when you don’t need it. While it might seem unlikely that a company goes out of business, it happens, and if so, your funds won’t have favorable protection.”
Can I Get More Insurance?
With the recent banking failures, additional insurance on deposits is becoming more attractive to Americans. So how can you cover gaps that traditional FDIC insurance doesn’t cover? Using a robo-advisor or automated investment firm is the way to go.
Companies such as Betterment increase coverage limits by spreading customer deposits. Their high-yield cash account “Cash Reserve” deposits money across a mix of up to eight banks. Each bank in turn insures individual deposits up to $250,000 which gives an investor up to $2 million ($4 million in joint accounts) in FDIC coverage. The plan includes the option to exclude banks as well, but that comes with the warning it could decrease your coverage.
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