What Is FDIC Insurance? How Can It Protect My Accounts?

We've all seen or heard the term “FDIC insured.” You can find it on your bank's website or on practically every brochure your local branch hands out. You can hear it spoken really quickly at the end of finance-related commercials on the radio.

It sounds like a good thing — after all, we have health insurance, car insurance, home insurance, etc. But we know what all of those things are and how they help protect us.

So what is the FDIC and what does its insurance do when it comes to our money?

What Is the FDIC?

Basically, the FDIC makes sure that, in the event of a bank failure, your money doesn’t disappear forever.

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the U.S. government. It was created during the Great Depression, in 1933, by the Banking Act. Its purpose was to help rebuild trust and integrity in the U.S. banking system. Before its creation, more than one-third of the banks in the United States failed, and people were routinely withdrawing money from banks in large enough quantity to cause a bank to close.

In 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress and signed by President Obama. It increased the amount of money insured from $100,000 to $250,000.

The FDIC does not insure money in credit unions. It only insures deposits in banks. That doesn’t mean that credit unions are left out in the cold, though. Credit union deposits are insured up to the same amount of money by another government agency, the National Credit Union Administration.

What Is FDIC Insurance?

The FDIC primarily provides deposit insurance for funds in bank accounts. These FDIC-insured accounts come with the full faith and credit of the U.S. government.

FDIC insurance is dollar-for-dollar coverage of funds in an insured account. It covers the principal plus any interest accrued through the date of default, up to a total of $250,000. Anything above that is not guaranteed.

If you had opened a savings account with $100,000 and had earned $25,000 in interest, the whole $125,000 would be insured by the FDIC.

However, if you have $200,000 in a checking account, $75,000 in a CD and $10,000 in a savings account, only $250,000 of your total $285,000 is insured by the FDIC.

It is important to note what types of accounts FDIC insurance covers.

Accounts that are covered:

• Checking accounts
• Savings accounts
• NOW accounts
• Money market deposit accounts
• CDs (certificates of deposit)
• Cashier’s checks and money orders

Accounts that are not covered:

• Stocks
• Bonds
• U.S. Treasury bills, bonds or notes
• Municipal securities
• Mutual funds (including money market mutual funds)
• Annuities
• Safe deposit boxes kept at a bank

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How Does It Work?

You don’t need to apply for FDIC insurance. You automatically receive it when you open an account at an FDIC-insured bank.

To find out if your financial institution is insured by the FDIC, ask a representative, or check online using the FDIC’s BankFind tool. Not all banks and financial firms are required to have FDIC insurance. However, it's become so common that not offering it would be a detraction.

As I mentioned above, deposits are insured up to $250,000. This is per depositor, per bank. However, there are a few exceptions to this standard.

In some cases, having a joint account means that you get double the insurance, since there are two depositors on the account. You each have the right to $250,000 in insurance, which means you get $500,000 total insured at the bank.

What About My Retirement Account?

There's a misconception that if you have a retirement savings account through an FDIC-insured financial institution, your money is automatically protected.

Here's the reality. If you've got an account such as an IRA with an FDIC member institution, your money is insured only if your funds are invested in FDIC-compliant accounts. That means the chunk of your money that's invested in CDs or money market accounts are covered. The money that's invested in stocks, bonds, mutual funds, etc., are not covered by the FDIC.

If you have any questions about what is and what isn't covered in your accounts, be sure to speak with a customer service representative from your bank.

Protection for Stocks and Other Securities

So what about your stocks and other securities? Even though they aren't covered by the FDIC, there are protections in place in case your investment brokerage goes belly up. These are provided by the Securities Investor Protection Corporation (SIPC), which will protect your brokerage accounts for up to $500,000 in net equity. (You can read more about the SIPC here.)

Final Thoughts

The FDIC came to be after the stock market crash and subsequent bank runs that caused the Great Depression. After seeing how the country and individuals were devastated by the struggles of the financial industry, the FDIC was created to restore faith in our banking system.

In the last 80 years, it’s done a generally admirable job of protecting people’s money. There’s no application process. FDIC insurance is essentially a free way to protect your money. It helps create financial peace of mind for those under its wings.