How FDIC Insurance Works – A Brief Review and Resources

The historical bank collapses we saw a few weeks ago has many of us taking a second look at our banking accounts and contemplating how FDIC insurance really works. As such we thought we should provide a quick review of the policy and some helpful resources.

What is FDIC insurance?

This type of insurance protects money you deposit in an FDIC-covered bank, subject to limits, and makes sure your money is available when you need it. This is true even in the unlikely event that your bank goes out of business. The FDIC insurance applies to only money you’ve deposited in accounts at banks. So, what if your money is in a credit union? Don’t worry. A different program — the National Credit Union Share Insurance Fund (NCUSIF) — insures credit union accounts..

You don’t have to apply for FDIC insurance. It automatically covers your funds as soon as you open a bank account in an FDIC-insured bank. And, unlike most insurance, you pay nothing for FDIC coverage. Member banks pay premiums to join the FDIC. Those funds are invested and used to pay claims to depositors if they’re ever necessary. You can confirm your bank is FDIC insured by visiting the website at FDIC.gov and search for “BankFind” or call 1-877-ASK-FDIC (1-877-275-3342).

Which accounts are FDIC-insured?

These days, many banks offer more than merely deposits. Among the available options, federal insurance covers checking accounts, savings accounts, and certificates of deposit (CD). If a bank or credit union fails, the insurance coverage kicks in. On the other hand, investments, and insurance products such as mutual funds and annuities are not covered by federal insurance, even if they are purchased at an insured bank. To view a full list of not insurance products, provided by the FDIC, click here.

How much FDIC insurance do I get?

In general, the FDIC insures each deposit account for up to $250,000 per each Employer Identification Number (EIN) or Social Security Number (SSN) within a bank.  It’s irrelevant how many bank accounts this is spread over.  This means that each business ‘entity’ (they would need to have different tax ID numbers), and personal account has FDIC coverage up to $250,000.

Here are some examples of how to calculate coverage:

• Personal: If John Smith has $15,000 in a checking account, $40,000 in a savings account, and $100,000 in CDs, all at the same bank, his entire $155,000 will be covered if that bank fails. There might be a straight payout to each depositor, or equivalent accounts might be opened at another bank that is financially sound.
• Business: If you have $1,000,000 sitting in an account or multiple accounts in the the bank, the FDIC insurance would only cover $250,000. As a result, your business would NOT be covered for $750,00 if the bank failed.

For businesses it is important to note that many banks offer a product called Insured Cash Sweep (ICS).  With ICS, you set a target balance in your account of $250,000 and any excess funds are swept from the primary bank to other ICS Network banks in an amount below $250,000. As a result, you benefit from the FDIC coverage at each of the banks. You do need to sign up for the product. Once signed up your banker will take care of the rest and you will only need to deal with them moving forward.

We know each business and individual’s situation is different and can become a bit confusing, so here is the FDIC calculator you can use to calculate your financial insurance position:  FDIC: Electronic Deposit Insurance Estimator (EDIE)

You can answer the questions anonymously on the estimator and get a good idea whether your bank accounts are adequately insured. Individuals, businesses, and government organizations can use EDIE to check how much FDIC-insurance coverage their accounts have.

You can also talk to your banker about your accounts or call the FDIC at 1-877-ASK-FDIC (1-877-275-3342).

How can I be sure that I am fully covered by FDIC insurance? 

The presence of federal deposit insurance provides a great deal of assurance, especially for businesses and individuals who keep very large sums in what are perceived to be low-risk deposit accounts. However, as with any financial matter if you have further questions on this topic, it is important to consult directly with your banker and other trusted advisors.