Is Your Bank Account Properly Insured?

Nothing drives up fear in the financial system like news of runs on banks. We had several large institutions go through a collapse in the last few weeks. Because of this, there has been renewed interest in understanding whether our individual deposits are safe. This is where it is important to understand how the FDIC works.

While bank failures are rare and justifiably headline-grabbing, the scarcity of failures is due, in part, to the banking system being undergirded by the Federal Deposit Insurance Corporation or what is commonly known as the FDIC. The FDIC was established in 1933 to offer stability to the banking system after the Great Depression, a time when many bank failures left their depositors without recourse to retain their deposits in several states. Legislation gave the FDIC not only the ability to insure
insure
deposits (the insured limit was originally $2,500) but also to regulate banks at a national level. The peace of mind that the deposits were backed up along with FDIC requiring banks to take measures to prevent runs helped bring the bank failure crises under control.

Are my deposits covered?

The level of how much the FDIC covers happens to be 100 times as much as it did in 1933. Most depositors can rest easy now that the insurance level is $250,000. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. According to the FDICs “Insurance at a Glance Guide”, this is not insurance you have to apply for. “Coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution.”

What if I have more than $250,000 in deposits?

So let’s break down the concept of $250,000 per depositor, per insured bank, for each ownership category. “Per depositor” depends on the number of account owners. One account owner means $250,000 is covered. If you own it jointly with another person, that can mean $500,000 in total coverage for that account. For example, if you are married, each of you can have $250,000 individually and you can own $500,000 in a joint account, bringing your total coverage to $1,000,000.

“Per insured bank” is clear. With more and more consumers using online banks to get higher yields on their savings, I think researching your bank’s insurance protection is imperative. You can verify the financial institution by visiting the FDIC online and looking up the bank. If your deposits are in a credit union, similar insurance is offered by the National Credit Union Share Insurance Fund. You can determine if the credit union has coverage by visiting MyCreditUnion.gov.

“For each ownership category” refers to the fact that FDIC insurance goes beyond simply savings and checking accounts. It also includes certificates of deposit, money market deposit accounts, and even cashiers’ checks. This means that if you own multiple accounts with one institution, it can multiply your level of coverage. An easy way to have the math done for you on how much FDIC coverage you have is to use this calculator offered by the FDIC.

What if my deposits exceed the amount of coverage?

Once you understand the 3 criteria listed above, you can try strategies like owning multiple account types and multiple ownership methods to expand your coverage. Be careful when doing this though. Changing the ownership of large accounts could trigger the need to file a gift tax return. Also, changing ownership can have unintentional estate planning implications.

Keep in mind you can always expand coverage by opening accounts at another institution. There are also products like the Certificate of Deposit Account Registry Service or CDARS. Services like CDARS give you the ability to access multiple banking institutions at one bank.

The recent news isn’t necessarily a reason to pull all your money out of your bank(s) and stuff it under your mattress. (Aside from the inconvenience and lack of interest, money under the mattress isn’t exactly safe either. Dangers include things like theft and fire.) Instead, consider taking prudent steps to make sure your money is adequately insured.