FDIC Insurance Limit: How Does It Keep Your Money Safe?

The Federal Deposit Insurance Corporation (FDIC) is an autonomous agency of the US government, headquartered in Washington, DC. Following the great depression of 1929, the stock market completely crashed. Consequently, Congress created FDIC to maintain stability and public confidence in the nation’s financial system. The aim to establish this agency was to insure deposits, examine and supervise financial institutions for safety, soundness, and consumer protection, making large and complex institutions resolvable, and management of receiverships.

The FDIC is controlled by a board of five directors, who are appointed by the U.S. president. The five board positions are chairman, vice chairman, director, comptroller of the currency, and director of the Office of Thrift Supervision.

The FDIC offers insurance to its consumers. The primary job is to protect consumers against financial losses if an FDIC-insured bank fails. Moreover, its deposit insurance empowers customers to confidently place their money in FDIC-insured banks across the country and is backed by full faith and credit of the US government.

As an independent agency providing deposit insurance facilities across the US, the FDIC has set insurance coverage limits. Deposit insurance is insurance, which protects depositors in case of bank failure. The current legal FDIC insurance limit is up to $250,000 per account owner/ownership category, per insured bank. This indicates individual accounts and joint accounts can each receive $250,000 of insurance at an insured bank with a common account owner. As with individual accounts, business accounts can also get FDIC insurance of up to $250,000 per entity per bank. FDIC insurance extends to both the principal and accrued interest while the account balance remains within the limits.

Please continue to read the full article if you wish to know more about the FDIC insurance limit and its operations in the US.

FDIC insurance meaning

What is FDIC insurance? What is an FDIC insured account? These are the questions that every layman or individual is even remotely related to the banking sector wants to know an answer to. The FDIC allows any person or entity to get FDIC insurance coverage in an insured bank. A non-US citizen can also have his or her deposits insured by the FDIC.

Having FDIC insurance means that your money in a bank is safe and insured up to a certain limit. However, to avail of FDIC insurance, your account must be in the bank insured by FDIC. This specific insurance policy helps the banks to continue their financial and banking operations with confidence. As we know, the reason behind establishing this particular agency by the government of the USA was to build confidence among financial institutions to make investments and create more businesses.

The banks do not get insured by default with FDIC, they have to apply for the insurance. The basic procedure to get insured is the same as other insurance companies. However, in this case, the bank pays the premiums not an individual customer of that bank. Moreover, it will cost nothing to the customer to have an account in an FDIC-insured bank.

Tools provided by FDIC

How can you know if the bank is a member of FDIC? The FDIC-insured banks must display an official FDIC sign at each teller window. However, it has also provided a few tools to know that your accounts and banks are FDIC insured and to find how much insurance coverage you have. Find below the information of tools:

• Is your bank insured?: The bank find tool will help you find out if your bank is insured or not.
• Are your accounts covered?: This tool is also available on their website. You can use this tool to know about what is and what is not covered?
• How much of your deposits are insured?: You can use the Electronic Deposit Insurance Estimator (EDIE) to know about your specific situation. This tool allows consumers and bankers to calculate their coverage on a per-bank basis, determine how much is insured, and what portion of your funds exceeds the coverage limits. Consumers can also learn how the insurance rules restrictions apply to their particular deposit accounts. The facility of printing out their report is also available after calculating your coverage using EDIE.

What is an FDIC insured account?

An FDIC-insured account means that if you have deposits up to the worth of $250,000 in the bank account, and your bank suffers a loss, the FDIC will reimburse the losses. There are two ways to reimburse your deposits up to the FDIC limit. First, if the bank fails, the FDIC will arrange the sale of the crashed bank, whenever it is possible. In this scenario, your deposits will be transferred to another bank. In the second following way, if the sale of a bank is not possible, then you will be eligible to receive money deposited at your original bank, up to the FDIC limits

Does FDIC insurance cover multiple accounts in the same bank?

If you have listened to radio or television, or any bank news, you must have heard about FDIC as well. The FDIC insurance has a general coverage limit rule, i.e., it only covers up to the limit of $250,000 per depositor, per FDIC-insured bank, per ownership category. This limit applies to both the principal amount and interest earned since you have deposited the money in a bank.

Let’s come to the main point now to know whether FDIC insurance offers coverage to multiple accounts in the same bank or not. The FDIC insurance does not cover multiple accounts in the same bank, hence funds deposited in different branches of the same bank are not separately insured. However, FDIC insures deposits that a person holds in one insured bank separately from other deposits that a person holds in another insured bank. This clearly indicates that funds deposited in different banks would each be insured separately up to $250,000.

Please continue to read more about what is covered and not covered by FDIC insurance!

It is important to understand that FDIC insurance has few limitations in terms of providing coverage. It covers all kinds of deposits received at insured banks, except investments, even those purchased at an insured bank. Hence not all accounts are eligible for the insurance. Let’s discuss what is covered and not covered.

FDIC insurance: What’s covered?

The FDIC covers the following deposit accounts by the insured bank:

• Checking accounts
• Negotiable Order of Withdrawal (NOW) accounts
• Saving accounts
• Money market deposit accounts (MMDP)
• Time deposits such as Certificate of Deposits (CDs)
• Cashier’s checks, money orders, and other official items issued by the bank

FDIC insurance: What’s not covered?

The following given items are not covered under FDIC insurance:

• Stock investments
• Bond investment
• Mutual funds
• Life insurance Policies
• Annuities
• Municipal Securities
• Safe deposit boxes or their contents
• US treasury bill, bonds, or notes*

*Please note that US treasury bills or notes are not covered under FDIC insurance, however, these are backed by full faith and credit of the US government.

FDIC insurance limit history

As we know, the FDIC was created by Congress as a result of widespread wild bank runs during the great depression. The purpose was to regain public confidence and stabilize the financial systems. The history of the FDIC insurance limit goes long back in time. Let’s dig in to know about the increase in FDIC limit over the years since its inception.

From 1933 to 1984

• Congress created FDIC in 1933. Initially, in 1934, the deposit insurance coverage limit was $2500, and then it was raised in midyear to $5000 per account.
• In 1950, the deposit insurance coverage limit increased to $10,000. Refunds were accepted as well to receive credit for profused assessments above operating and insurance losses.
• In 1960, FDIC’s insurance fund crossed over $2 billion.
• In 1966, deposit insurance rose to $15,000.
• In 1969, the deposit insurance increased to $20,000.
• In 1974, the deposit insurance increased to $40,000.
• In 1980, deposit insurance increased to $100,000, whereas, the FDIC insurance fund was $11 billion.

After 1960, the banking operations started to change in the USA. New laws came into existence in the banking sector pertaining to expanding the network of branches throughout the country. This went well in favor of banks throughout the 1970s. This economic development proved beneficial for marginal borrowers to meet their financial obligations, however, the system caught up in the 1980s due to the high need for deposit insurance.

In the following time, the USA had to face an economic situation, developed for the banking sector due to the high inflation rate, recession, and deregulation. This situation led to the failure of most banks and for the first time since creation, FDIC was required to pay claims to the depositors of failed banks.

From 1983 till present

• In 1983, deposit insurance refunds were discontinued.
• In 1987, congress resumed its financing to Federal Savings and Loan Insurance Corporation (FSLIC) for $10 billion.
• In 1988, 200 FDIC-insured banks failed and the FDIC lost money for the first time.
• In 1989, the Resolution Trust Corporation was created to dissolve the thrift issues.
• In 1990, the first increase was witnessed in FDIC insurance premiums from 8.3 cents to 12 cents per $100 of deposits.
• In 1991, insurance premiums hit 19.5 cents per $100 of deposits. FDICIA legislation increased FDIC borrowing capacity, the least-cost resolution was imposed, new procedures were incorporated into law, and a risk-based premium system was initiated.
• In 1993, banks began paying premiums based on their risk. Hence, insurance premiums reach 23 cents per $100.15.
• In 1996, the Deposit Insurance Funds Act prevented FDIC from assessing premiums against well-capitalized banks if the deposit insurance funds exceed the 1.25% designated reserve ratio.
• As of April 1, 2006, deposit insurance for individual retirement accounts (IRAs) was increased to $250,000.
• The Emergency Economic Stabilization Act (EESA) of 2008 was signed on Oct. 3, 2008. This temporarily raised the basic limit of insurance coverage from $100,000 to $250,000 per depositor. The legislation provides that the basic deposit insurance limit will return to $100,000 on Dec. 31, 2009.
• In 2010, new legislation made the maximum FDIC coverage limit up to $250,000 permanent until now.
• In 2012, the FDIC approved a rule that required insured banks with $50 billion or more in assets to provide resolution plans of the event that caused the failure.

The history of FDIC insurance coverage limits has its own fair share of ups and downs, however, the agency despite every challenge has always been moving forward. The government ensured that the past mistakes would not affect the banking operations and its customers.

Will FDIC make changes to its current coverage limit?

The history shows the changes to FDIC insurance coverage limits have been irregular. The world is facing pandemics since early 2020, which had quite adverse effects on the economy internationally. The US has also experienced the effects of the Covid-19 pandemic. As of now,  the banking failures have not caused any major failures during this crisis. However, the government of the US can make changes, if need be!

FDIC insurance limits and ownership categories

As of now, you must be aware that the FDIC maximum insurance coverage limit is $250,000 per depositor, per insured bank, for each account ownership category. The FDIC provides its customers separate coverage for their deposits held in different ownership categories. The agency offers over $250,000 coverage to the depositors if they hold funds in different categories after fulfilling all FDIC requirements. Whereas, if all deposits of an account holder are in the same ownership category, the deposits will be added together and insured up to the standard limit.

Before we move on to discussing ownership categories, let’s understand the meaning of per depositor, per insured bank, and per ownership category.

• Per depositor, per institution: These terms are commonly used when discussing FDIC insurance coverage. Per depositor means one person who has deposits in per institution (one institution), which FDIC insured.
• Per ownership category: Per ownership category simply implies the ownership of an account, for example, a single ownership category means an account is owned by a single person.

There are different categories of FDIC insurance limits. Below given is the table explaining FDIC insurance coverage limits by each ownership category.

In the following of each ownership category, below mentioned are some examples referring to each category.

Single account

The deposit accounts that come under a single account are as follows:

1. Checking accounts
2. Money market deposit accounts
3. Saving accounts

Joint accounts

An account owned by one or two persons, without any named beneficiary, is known as a joined account. To avail of its coverage, the following conditions must be met:

1. A person must be living
2. Self-directed Keogh plan accounts
3. Sign the deposit account card (an exception to CD). Electronic signatures are also acceptable.
4. Mutual rights for both owners

Certain retirement accounts

In this ownership category, the plan participants have full authority to direct their money or make decisions about the investment. All retirement accounts mentioned below are added up together and insured up to $250,000. This category includes the following deposits:

1. Individual retirement accounts (IRAs)
2. Self-directed defined contribution plans
3. Self-directed Keogh plan accounts
4. Section 457 deferred compensation plan accounts (whether it is self-directed or not)

Recoverable trust account

Any deposit account owned by one or more persons, that presents one or more beneficiaries will receive the deposits upon the death of the owner or owners. This comprises both formal Living Trusts and informal In Trust For (ITF) / Payable on Death (POD) accounts.

• A revocable trust can be revoked, terminated, or changed at any time upon the judgment of the owner or owners. The account title must disclose the trust relationship with phrases such as Living / Family Trust, POD, or ITF.
• Beneficiaries must be people, charities, or non-profit organizations, and must either be named in the bank records or spotted in the trust document.

In this category, all recoverable trust accounts owned by the same person at the same bank are added together, and the owner is insured up to $250,000 per beneficiary.

Irrevocable trust account

It is a deposit account, which is held in connection with a trust established statute or written agreement. The agreement states that an individual will contribute his or her deposits or property to the trust and lose all powers of deposits or property. This normally comes into existence after the death of the owner. These trusts normally generate contingent interest, subsequently being insured up to $250,000.

Employee benefit plan account

This account represents deposit funds, of which plans are made by the plan administrator, not by the participants. In this category, each participant’s non-contingent interests are insured per bank.

Corporation, partnership, or unincorporated association accounts

This category involves deposit accounts owned by the corporation, partnership, and unincorporated associations, involving both for-profit or non-profit organizations. All deposits owned by a corporation, partnership, or unincorporated association in the same bank are added together and insured up to $250,000. These accounts are maintained separately from the personal accounts of the owners or members.

Government account

The government accounts include deposit accounts owned by:

• The United States, which includes federal agencies as well.
• Any state, county, municipality (or a political subdivision of any state, county, or municipality), the District of Columbia, Puerto Rico, and other government possessions and territories.
• An Indian tribe.

The official custodian of any public unit is insured up to $250,000 per bank. The coverage amounts may vary depending on the type of deposit and whether the public unit is located in the same state as the bank.

3 ways to insure excess deposits by FDIC

If you have been reading this article from the top, you must have learned well about FDIC insurance limits, the maximum coverage, and ownership categories. As you are aware the FDIC insurance coverage limit is up to $250,000 per depositor, per bank, for each ownership category. If you keep higher balances in your bank, you must know how much of your balances fall under the FDIC coverage limit. Let’s understand this with the help of an example. If you have single ownership of a checking account and savings account at the same bank. You have $25,000 in a checking account and $275,000 in a savings account, according to FDIC insurance per account rules, $50,000 from your ownership will not be covered.

To avail of FDIC insurance, you do not have to do anything except create an account and maintain deposits in an FDIC-insured bank. However, if your deposits are in millions, what would you do to get excess balances insured by FDIC? Let’s find out.

1. Open New Accounts at Different Banks

The easiest way to insure excess deposits above the FDIC insurance limit of $250,000 is to keep your deposits at different banks. However, you will be required to do research about the right bank to put your deposits in. For example, if you intend to keep your deposits in savings accounts, you must compare interest rates and fees at different banks. Online banks typically offer higher annual percentage yields to savers and lower fees as compared to conventional brick-and-mortar banks.

2. Use CDARS to Insure Excess Bank Deposits

Certificate of deposit (CDs) accounts can be useful if you have a long-term saving agenda. If you want to use CDs as part of your savings strategy, it is possible to use them to work around FDIC insurance limits through the Certificate of Deposit Account Registry SErvice (CDARS). CDAR has a huge network of banks, which insures deposits of millions for CD account holders.

To get started with CDAR, you will have to sign a placement agreement and custodial agreement. Afterward, you will be able to keep your savings with a member bank of your choice. Your money will be invested in different CDs issued by CDAR banks. Theoretically, this could give you an option to invest millions and have it insured under the FDIC coverage limit.

3. Consider Moving Some of Your Money to a Credit Union

Credit unions provide a safe haven for excess bank deposits. Credit unions are not covered under FDIC insurance protections, they are still protected. The National Credit Union Administration (NCUA) insures deposits up to $250,000 per depositor, per credit union, for each ownership category.

Conclusion

The FDIC is an independent agency working under the government of the US. After the great recession before 1933, the US faced huge financial setbacks, consequently, congress enacted the Federal Deposit Insurance Corporation. The FDIC basically provides deposit insurance for those banks or financial institutions, which are FDIC-insured. The customer does not have to pay to avail of any of the services provided by FDIC, he or she must only have an account at an FDIC-insured bank. However, the FDIC insurance has some coverage limits as per deposit, per bank, or per ownership category. Hence, this agency has proved beneficial for country-wide financial structure and has managed to recover losses in case of bank failures.