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FDIC-Insurance Limit: Protecting Deposits When Banks Fail

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In 15 bank failures prior to 1999, more than $114 million in deposits were uninsured. Here's how to keep your money safe - even if it's in a bank that fails.

bank-vaultWhen opening a checking or savings account, it is important to know that your money is safe.

That's because, even though it is relatively rare now, a bank failure can happen that could wipe out everything in your accounts if they're not insured.

The Federal Deposit Insurance Corporation (FDIC) offers insurance to protect consumers against bank failures. And since 1934, the FDIC has never failed to cover an insured deposit when a bank went bust.

It's surprisingly simple to check if a bank is insured by the FDIC, but there are limits.

To avoid any uncertainty about whether your bank deposits are protected, learn more about the role of the FDIC and its limits.

How to Tell if a Bank is Covered by FDIC Insurance

All FDIC-member banks must display the official FDIC sign at each teller window and on their websites. But the FDIC has a BankFind tool that allows you to search for whether a given bank has FDIC deposit insurance.

Look for this image to confirm FDIC insurance:

FDIC Official Teller

>> Use the FDIC's BankFind tool on the official FDIC website

FDIC insurance rules and limits apply to a number of different types of deposit accounts. There are, however, some exclusions as to what qualifies for insured deposits. Here's a comparison of what the FDIC covers and what it doesn't.

Which Accounts Are Covered by FDIC Insurance?

Protected deposit products

The FDIC insures a specific group of deposit accounts:

  • Checking accounts
  • Savings accounts
  • Negotiable Order of Withdrawal (NOW) accounts
  • Money market accounts (MMAs)
  • Certificates of deposit (CDs)

Most of these are likely familiar to you. For instance, you may have a checking and savings account at your current bank, or have past experience saving money in a money market account or CD account.

A Negotiable Order of Withdrawal or NOW account is something with which you might not be familiar. A NOW account is essentially another way of referring to an interest-bearing checking account. The main difference between a NOW account and any other type of checking account is that you can't automatically withdraw on demand. Legally, banks have the right to request seven days' written notice, though they may not enforce this rule.

Other bank items

In addition to those deposit accounts, the FDIC also offers insurance coverage for:

  • Cashier's checks
  • Money orders
  • Traveler's checks
  • Accrued interest and other liabilities

There are no special rules you have to meet to ensure that you're covered. As long as the institution holding these deposits is FDIC-insured, so are the deposits. In addition, many brokerages offer FDIC-insured CDs to their customers.

Which Accounts Do Not Have FDIC Insurance Coverage?

The FDIC insurance limit protecting deposits when banks fail doesn't offer blanket coverage. Assets from failed banks or other financial institutions that wouldn't be covered include:

  • Annuities
  • Stocks
  • Bonds
  • Life insurance policies
  • Mutual funds
  • Municipal securities (such as municipal bonds)
  • Safe deposit boxes and their contents
  • U.S. Treasury bills, bonds or notes

There is an upside, however. Any U.S. Treasury bills, bonds or notes you own are backed by the full faith and credit of the U.S. government.

How Much Is Covered Under FDIC Insurance Limits?

It is critical to know the extent of insurance coverage when it comes to your deposit accounts. For FDIC insurance limits, the current limit is $250,000 per depositor, per bank.

It's important to note that what's insured and what portion of your assets are protected is an aggregate amount, not an individual amount for each account.

So if, for example, a depositor has a $210,000 CD that has accrued $6,000 in interest, $5,000 in a checking account and $45,000 in savings, all at the same bank, the total of $266,000 isn't insured. Only $250,000 is fully covered if that bank goes under. The other $16,000 that exceeds coverage limits is vulnerable.

But, you're bound by these limits at that bank only. If you were to hold a $250,000 CD at Bank A and another $250,000 CD at Bank B, the principal in both CDs would be fully protected by the FDIC insurance limit.

However, this doesn't work if you have these CD accounts at different branches of the same bank.

And if you have accounts at two different banks that merge, you have a six-month grace period to move accounts if the total balance exceeds FDIC coverage limits.

Does Adding Owners to an Account Increase Coverage?

You may also be wondering if any ownership rules determine how the insurance coverage applies. The short answer is that the ownership category does matter for how assets are covered.

If an individual has a $500,000 jumbo savings account, only the first $250,000 is covered. But if the account is put in the names of an individual and his spouse, each gets $250,000 of coverage, so the entire account balance could then be insured (assuming that neither spouse has other deposits at the same bank).

A cautionary note: Both individuals must have full and equal access to the funds (even in community property states) or the FDIC will consider only one of them an owner. The coverage then drops to $250,000.

Does Opening Different Accounts at the Same Institution Increase FDIC Insurance Coverage?

Coverage can be increased by opening accounts if they're in a different ownership category. Rules and limits apply. Here's a quick rundown of how different accounts are covered:

IRAs - Individual Retirement Agreements

IRA accounts - self-directed or traditional - are insured to a maximum of $250,000, and that is in addition to the $250,000 on other savings.

Corporate accounts

Corporate (but not sole proprietorship) accounts are treated as separate from personal accounts and subject to their own $250,000 limits.

Trust accounts

Trust accounts may qualify for up to $250,000 in coverage per beneficiary if certain conditions are met.

Joint accounts

Joint accounts are protected for up to $250,000 at each institution. So a married couple could keep $1,000,000 liquid and insured by dividing up the money as follows: husband's single account: $250,000, wife's single account: $250,000, joint account: $500,000 ($250,000 each).

Are There Other Ways to Gain Additional Insurance Coverage?

There are. The Certificate Deposit Account Registry Service (CDARS) allows depositors at banks registered with the network to buy FDIC-insured CDs up to a total of $50 million. This is possible because the network takes care of spreading the funds throughout different banks.

The only drawback is that the CD rates offered may be lower than what could be obtained by shopping for rates with competing institutions. But each of your CDs would be protected if one bank fails.

Are Credit Unions FDIC-insured?

Credit unions offer their own version of FDIC coverage through the National Credit Union Administration (NCUA).

The National Credit Union Share Insurance Fund covers deposit accounts at credit unions, up to $250,000. Credit union members' interest in all joint accounts combined is insured up to $250,000 as well. The Fund also offers the same coverage limit for IRA and KEOGH accounts and has the full faith and credit of the U.S. government.

How Does the FDIC Pay Depositors When a Bank Fails?

If the FDIC is able to get another institution to take over, all accounts are merely transferred to the new institution when a bank fails. For example, customers of Washington Mutual were not affected because their accounts were immediately transferred to J.P. Morgan.

If no banks can be found to take over, the FDIC cuts checks directly to the account holders, usually in a matter of days. It's the FDIC's goal to get money to consumers within two business days of a bank's failure, though this doesn't always happen.

What Coverage Mistakes Do Investors Most Commonly Make?

In 1999, a customer found that, of his $1.4 million deposited, nearly $1 million was uninsured when his bank went under. You might be wondering how that is possible. The FDIC claims that these most common errors result in unintentionally uninsured funds:

Underinsured joint accounts

Joint accounts can go underinsured if one account holder is unaware of accounts held by the other at the same bank -- for example, if a couple has $500,000 in jointly held funds at their bank, but one spouse has another $100,000 stashed in a joint account with someone else such as a child from a previous marriage. The total of $300,000 for that spouse exceeds the limit of coverage for joint accounts.

Deposits by real estate agents, attorneys or brokerage firms going to existing accounts

This may be less common, but it is still a possibility. For example, money can be put into escrow for real estate transactions, used to purchase CDs as part of an investment strategy or paid as an inheritance or settlement. If those deposits go into financial institutions where you already have accounts, the balances could exceed insured limits. The result would be that you'd be left uninsured if a portion, if any, exceeds the amount of allowed coverage.

Brokerage accounts not appropriately titled

Brokerage accounts can cause other problems as well. If a broker pools an investor's funds with others but the account is not properly titled, it will only be insured up to the $250,000 limit regardless of how many actual investors own the money. The FDIC suggests that investors know what institutions their agents or representatives are using and keep track of all account balances.

How to Make the Most of Deposit Insurance Coverage

A little diligence is all it takes to keep accounts insured, and the FDIC is very forthcoming about the methods that can be used by depositors to maximize their coverage. In fact, there's even an online tool for telling depositors exactly what's insured and what isn't.

The Electronic Deposit Insurance Estimator, or EDIE online calculator, lets depositors determine the amounts that are insured, based on account-ownership type and balance. It's a simple way to ensure that you're protecting the money you're working hard to save.

Find more information on which institutions are covered under FDIC insurance by visiting the savings accounts page.

 

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