Most people know that most bank accounts are insured but they may not know how this insurance works. Most but not all bank accounts in the United States are insured by a federal agency called the Federal Deposit Insurance Corporation or FDIC. This entity acts as both an insurance company and a watchdog for the nation’s banking institutions. It insures most bank accounts against specific kinds of losses.
What the FDIC Insures
The FDIC insures account holders against the failure of the bank. Its’ insurance is designed to make sure that average people will not all of their money if a bank goes out business. The agency was set up in the 1930s when banks collapsed because of the Great Depression and many people lost all of their money.
The FDIC will insure you if your money is lost because of a problem at your bank. An example of this would be if your funds were embezzled or mismanaged by a bank official or if your bank simply lacks the funds to cover all the accounts. It will not insure your account if you lose your money through your own actions, for example if you overdraw your checking account.
The agency normally insures funds in accounts held directly by banks including savings and checking accounts and certificates of deposit. Some money market accounts are insured but money market funds are usually not insured. It will not insure many securities and investments sold by banks including bonds, derivatives, mutual funds and annuities. Nor will insure investment vehicles such as mutual funds and Exchange Traded Funds.
Anything kept in a savings deposit box is not insured by the FDIC. The contents of a savings deposit box will be insured by the bank’s private insurance company.
The normal amount the FDIC insures accounts for is up to $250,000. Any funds over that amount may not be insured. Persons with more than $250,000 need to keep it in separate accounts or banks or put it into another kind of insured investment such as an annuity. Insurance companies will guarantee an unlimited amount of money in annuities. The FDIC can guarantee larger amounts in extraordinary situations and did so during the financial crisis of 2008.
How the FDIC Operates
The FDIC monitors the health banks and steps in if its officials believe that a bank is about to fail. A bank failure means that the institution lacks the funds to meets its obligations. It may not have enough available to cover all the funds in the checking and saving accounts for example.
If this happens the FDIC steps in and takes over the failing bank. It then turns the accounts and assets of that institution over to another healthier entity that can meet its obligations. The account holders should not notice any difference when this occurs. They will receive money in FDIC insured accounts. Funds held outside such accounts can be lost in a bank failure.
Make Sure Funds are Insured
If an account or product offered by a bank is insured by the FDIC it should say so in the paperwork or prospectus that comes with it. If these documents do not mention FDIC insurance the product probably is not insured. Generally only accounts and CDs are insured. You can check the FDIC’s website for a full list of insured and uninsured items.