How Does FDIC Insurance Work?

Understanding FDIC Insurance 

With the recent failures of Silicon Valley Bank and Signature Bank it's natural to wonder exactly how a bank safeguards your money. Fortunately, the Federal Deposit Insurance Corporation (FDIC) insurance exists for this very reason: to help protect your funds once deposited. What’s the purpose of FDIC insurance? How does FDIC insurance work? What does FDIC insurance cover? Read on learn how your bank accounts are and are not protected.

What Is FDIC Insurance?

The FDIC is an independent government agency that helps protect bank depositors from the loss of uninsured deposits at an FDIC-insured bank. This organization oversees FDIC deposit insurance, which provides some protection to bank customers if an FDIC-insured institution fails. In other words, FDIC insures your money at the bank up to certain limits.

A bank failure is an unlikely situation, but it does happen. Since 2009, 513 banks have failed5. When this occurs, the FDIC provides depositors with an insurance payout. That can be up to $250,000 per depositor per institution for each account ownership category. When the two banks failed in Q1 2023, regulators took steps above and beyond the $250,000 limit to protect deposits.1,2

Remember that if your bank is an FDIC-insured institution, you don't need to apply for FDIC insurance because coverage is automatic.

The Purpose of FDIC Insurance

FDIC insurance covers traditional deposit accounts of up to $250,000 per depositor. These traditional deposit accounts include the following:

• Checking accounts
• Savings accounts
• Certificates of deposit (CDs)
• Money market bank deposit accounts
• Prepaid cards (assuming they meet all FDIC requirements)

In addition, the FDIC also insures retirement accounts in which plan participants have the right to direct how they invest the money, including:

• Traditional or Roth Individual Retirement Accounts (IRA) savings accounts
• 401(k)s or other self-directed defined contribution plans
• Section 457 deferred compensation plan accounts, whether self-directed or not

The FDIC may also insure an employee benefit plan that is not self-directed, such as a pension plan.

FDIC Insurance Limitations

Now that we understand what FDIC insurance covers let's also look at what it doesn't cover. The FDIC states that it does not cover the following:3

• Stocks
• Bonds
• Mutual funds
• Life insurance policies
• Annuities
• Municipal Securities
• Safety deposit boxes or their contents
• US Treasury bills, bonds, or notes

Note the federal government guarantees U.S. Treasury bonds, bills, and notes on timely principal and interest payments. However, if you sell a Treasury before maturity, it may be worth more or less than the original price paid.

Here is a video produced by the FDIC explaining Deposit Insurance Coverage for personal accounts.

FDIC Insurance and You

As mentioned above, the FDIC insures up to $250,000 for a single or joint account per depositor; This means that you can have either one account or multiple accounts at the same bank, but only $250,000 may be insured.

There are strategies to increase your coverage. Hypothetically, you could set up a revocable trust and identify one or more beneficiaries to possibly increase your coverage. Each beneficiary may receive $250,000 of coverage. For example, a revocable trust account with one owner that names three unique beneficiaries can insure themselves up to $750,000.4

Remember, using a trust involves complex tax rules and regulations. Before moving forward with a trust, consider working with a professional familiar with the rules and regulations.

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