The Federal Deposit Insurance Corporation, better known as FDIC, is the independent agency of the U.S. government providing deposit insurance to guarantee security and safety to money of depositors of FDIC member banks. Created by the Banking Act of 1933, the Federal Deposit Insurance Corporation (FDIC) was initially a temporary solution to restore stability of banks amidst continuous bank failures as well as bank runs.
Prior to the establishment of the FDIC as a permanent federal agency in 1935, bank depositors would lose large sums of cash and were left with nothing if they didn’t get their deposits out before their banks went under. Funded initially by the U.S. Department of Treasury with the amount of $289 million, the FDIC has since then been funded by its member banks and financial institutions.
The FDIC now covers several types of deposit accounts inclusive of the principal and accrued interest up to the FDIC insurance limit of $250,000. Insured funds are made available within several days after closing an insured bank to its depositors.
What You Need to Know About FDIC Insurance
FDIC Insurance Coverage of Account Ownership
Single Accounts FDIC Insurance Limits
All accounts which are owned by a one individual under that individual’s name are considered single accounts. Here are several examples of how single accounts are covered by FDIC Insurance
- If you have a savings account, checking account, and a Certificate of Deposit (CD) in the same bank under your name, these accounts are all added together for one FDIC insurance amount of $250,000.
- You have $100,000 in your checking account and $200,000 in CDs which are both under your name which would total $300,000, of which $50,000 would be uninsured because $250,000 is the maximum amount for insurance coverage.
- Both the $100,000 in your checking account at one bank and the $200,000 worth of CDs at another will be covered because the Federal Deposit Insurance Corporation limit is $250,000 coverage for each FDIC insured bank.
- Your $200,000 in your Individual Retirement Account (IRA) and $100,000 in checking account are both covered because the FDIC considers your IRA as a Self-Directed Retirement Account which is treated as a separate titled account like your checking account; this means that the FDIC will give you $250,000 as coverage of your checking account and another $250,000 for your IRA.
- If you have a Simplified Employee Pension or SEP of $100,000 and another $100,000 in an existing IRA at the same bank, both of these accounts are provided coverage by the FDIC because both are considered IRAs and total less than the FDIC 2014 limit of $250,000.
Joint Accounts and FDIC Insurance Limits
Each individual’s share of the joint account is added and, together, the total sum is insured for up to the amount of $250,000. If you and your spouse/partner have $200,000 in your joint checking account as well as $200,000 in a jointly-owned and titled CDs deposited in one bank, the coverage would be $400,000 because the total sum of the individual shares which your and your spouse/partner have between you is not more than $500,000.
Revocable Trust Accounts
These accounts may be Payable-on-Death or POD accounts or living trusts and family trusts called estate planning trusts. Particular conditions have to be complied with such as submission of certain documents for this kind of account. Each account may be insured for up to the amount of $100,000 for each beneficiary who qualifies. Qualifying beneficiaries include the account holder’s spouse, child (biological, adopted or stepchild), grandchild, parent or sibling.
What the FDIC Insurance Does Not Cover
FDIC insurance coverage is not applicable to money deposited in stocks, mutual funds, life insurance, bonds, U.S. Treasury obligations, uninsured bank deposits, and annuities. Although the FDIC covers up to the amount of $250,000 for a single account holder at one FDIC-insured bank, there are various categories of accounts which may allow the account holder to increase the amount of coverage.
FDIC Coverage Using CDARS
A person who has $1,000,000 in CDs may need to open an account without insurance on $750,000 or open four accounts at the same number of banks. There is also a single bank account that is able to provide FDIC insurance limit on the $1,000,000 through CDARS or the Certificate of Deposit Account Registry Service. This program involves using a wide network of banks all over the country to provide whatever additional FDIC coverage is needed.
Managed by Promontory Interfinancial Network, this program is simple and convenient for those who have large sums of money that needs to be deposited. Every dollar which exceeds the FDIC insurance limit of $250,000 is deposited in some other bank; this bank deposits the same amount of money in the primary bank. If you have $300,000, for instance, the primary bank could retain $240,000 to keep the amount under $250,000 after earning the succeeding year’s interest but retain the $60,000 remainder in the secondary bank.
Now that the depositor has less than the $250,000 limit in each back, the $300,000 in its entirety is insured by the FDIC; the second bank deposits the $60,000 from a different, second depositor’s account back to the primary bank to balance everything. If the second depositor has $600,000, he or she will deposit it in three different banks and the original depositor would have $1,000,000 deposited to five different banks.
The Catch to FDIC Insurance Limits
The bank takes additional funds off the payment to the original depositor to cover additional costs incurred by the CDARS program, albeit the original depositor is still likely to earn more from it (because of the vast networking of more than 600 banks used in the transaction) than he or she would have if he or she left the entirety of the money with the local bank.
Furthermore, the banks in the CDARS network are either small or medium sized institutions and a majority of them is not affiliated; some depositors “threaten” their banks with the withdrawal of their wide array of CDs unless CDARS is provided to them. The CDARS program, incidentally, has been highly endorsed by the American Bankers Association.
The 2014 FDIC Limit of $250,000 is Now Permanent
The Dodd-Frank Wall Street Reform and Consumer Protection Act, or simply “Dodd-Frank,” has been signed by U.S. President Barack Obama in July 2010, increasing the maximum deposit insurance to $250,000 before it would have expired on December 31, 2013, making this erstwhile temporary increase permanent. The FDIC 2014 insurance limit is applicable to a single depositor as per the insured bank or depository institution for each account category.
Simply put, a combined checking, money market, and savings accounts and CDs of a single depositor at one bank which totals $250,000 or less may now all be insuredunder the FDIC 2014 limit. Joint accounts may now be covered for up to the amount of $500,000. This coverage is applicable for one bank, meaning, if a depositor has $250,000 deposited with ten various banks, all of his or her deposits will have coverage.
What the FDIC Does After It Becomes Receiver
It is not obligatory for the FDIC to give an advance notice when a bank is closed. A depositor receives a letter stating the takeover of their bank by another and if the accounts of the depositor are all insured by the FDIC, then he or she has nothing to worry about. The FDIC is appointed as “receiver” of a failed bank and sells the bank’s assets in order to pay depositors as well as creditors.
If there is an excess of cash from the proceeds of the sale, and after expenses of the FDIC as receiver have been taken care of, then the FDIC may choose to declare and subsequently distribute dividends to claimants. The first line of claimants is that of remaining deposits which are uninsured and then institutional liabilities, followed by subordinated obligations, and obligations to the failed bank’s shareholders.
How Payment is Made to Uninsured Depositors
Uninsured depositors usually get an advance dividend within a month (or 30 days) after the failed bank’s closure. The FDIC sees to it that this is done promptly and as receiver, the Federal Deposit Insurance Corporation determines availability of net proceeds from the conversion of all assets of the failed bank; if funds are available, the FDIC pays out a traditional dividend until all of the funds are disposed.
A few banks do fail yearly but around 99% apparently do not. If you have deposits which have remained uninsured, the best thing to do is obtain information on how private bank rating agencies are sizing up your bank. When your money is in an FDIC-insured bank, you cannot lose it even if the bank fails. A depositor of a bank that is covered by FDIC insurance has yet to report loss of money when the bank fails.