FDIC: How It Works and Why You Need it

Estimated read time: 3 minutes

It wasn't too long ago that we saw banks around us fail. While banks are in general very safe places to keep your money, you want to make sure they are protected.

That means you should be using a bank that is insured by the Federal Deposit Insurance Corporation. Credit unions also have this protection through the National Credit Union Administration.

How FDIC came to be

Bank failures were happening at an alarming rate during the Great Depression. Dozens of banks failed, leaving consumers who kept their money in them at risk. People were afraid to hold their money in banks. That led to the establishment of the FDIC in 1933.

The idea behind the FDIC was to insure consumers' deposits to create confidence with the public about using banks. When eight banks failed in 2015, not a dime of insured deposits were lost.

FDIC insurance is like other types of insurance. There is a cost to it, so not all banks choose to get insured. It's the bank who will pay the cost of FDIC insurance.

With the FDIC, each depositor is insured up to $250,000 per institution and ownership category. Deposit accounts like checking, savings, certificates of deposit, and money markets are covered. This coverage will kick in only in the event of a bank failure.

If you incur losses from investments, those will not be covered. It also doesn't cover safe deposit box contents you may keep at a bank.

Understand the coverage limitations

Here's an example to show you how the coverage works. All of your money is at one bank, all in your own name. Say you have $25,000 in checking, $150,000 in savings, and $250,000 in CDs. That brings you to a total of $425,000 in deposits.

Since the FDIC only insures up to $250,000 per depositor, institution, and ownership category, you could lose $175,000 if your bank failed.

Ways to get the most coverage for your money

Probably the simplest way to make sure all your money is insured is spreading your money around to different institutions. From the scenario above, you could keep up to $250,000 in that current bank. You would then put the other $175,000 in a second bank to make sure your fully protected.

With the ownership categories, you can potentially get all your money insured without having to spread your money across banks.The "ownership category" just means who owns the account. When there is one person who owns the account, it's considered a "single". When more than one person owns an account, then it is "joint".

For example, if you're married and you have a joint checking account for $300,000 with your spouse and an individual savings account with $250,000, all of your money is protected. The joint account is covered for up to $500,000 (that's $25,000 for each person on the account).Your savings, which is in your name only, is also completely covered for the $250,000.

Getting your money back

In the event a bank that has federal insurance through the FDIC fails, you will need to understand how you will get your money back. The FDIC will sell the deposits and loans from the failed bank to one that is financially stable. If this happens, all customers' accounts from the failed bank will simply be transferred over.

If a sale can't be made, the FDIC will send out checks for the insured amounts. This will usually happen within a couple days from when the bank closes. If a customer needs to take further action to receive their deposits, they will be sent a notice by mail.

What steps you need to take from here

The FDIC has a BankFind tool on their website that will help you to find out if your bank is insured. Your bank's website or local branch should also have that information available.

Check your accounts and make sure you aren't hitting up against that $250,000 limit from one bank. If so, take steps to spread your money out between other banks or use the ownership categories in your favor.