What Is Deposit Insurance and Why Does it Matter?

Deposit insurance keeps your money safe, even if your bank shuts down. In the United States, the Federal Deposit Insurance Corporation (FDIC) provides this insurance for bank deposits, and the National Credit Union Administration (NCUA) offers similar insurance for credit union deposits.

The FDIC is a special agency created by the U.S. Congress in 1933 during the Great Depression. It ensures that your deposits are covered up to a certain limit if a bank or thrift institution fails. This means that if your bank shuts down, the FDIC will pay back your insured deposits up to specific established limits.

FDIC insurance is required for all banks and thrifts allowed to operate in the U.S. The insurance is paid for by these institutions' premiums, not taxpayer money.

Key Takeaways

The FDIC is a U.S. government-backed agency that protects consumers during bank failures. It guarantees bank consumers that their money is safe for up to a limit of $250,000 per depositor, bank and ownership category.

FDIC insurance offers protection for traditional bank deposit products, such as checking and savings accounts, but does not extend to investments or non-bank products.

The NCUA is an independent federal agency that regulates and supervises federal credit unions, offering the same insurance limits.

How FDIC Insurance Works

FDIC insurance serves as a safety net for bank depositors and ensures the protection of your funds.

It's Required for Banks

FDIC insurance is required for banks and thrift institutions in the U.S. approved to operate. This insurance is funded through premiums paid by these financial institutions.

It Ensures Up to $250,000 Per Bank, Per Category

Each depositor is insured for up to $250,000 per FDIC-insured bank, per ownership category. This means that if a depositor holds multiple accounts in different ownership categories in the same bank, each account is separately insured up to the limit.

It Covers a Range of Deposits

FDIC insurance covers a range of deposit accounts, including checking and savings accounts, certificates of deposit and certain retirement accounts, such as IRA accounts. It also includes items such as cashier's checks and money orders held by the bank.

It Steps in After a Bank Fails

In the event of a bank failure, the FDIC takes steps to protect depositors' funds. It can either arrange the transfer of funds to another insured bank or issue insurance payments to depositors.

FDIC insurance covers several types of deposit accounts, including:

Checking accounts
Savings accounts
Money market deposit accounts
Certificates of deposit (CDs)
Trust accounts
Employee benefit plan accounts
Certain retirement accounts, including IRAs (individual retirement accounts)

You don't need to apply or pay any fees to get FDIC insurance — it’s free protection that comes with eligible bank accounts.

NCUA Insurance

The National Credit Union Administration (NCUA) is a federal agency that acts as an independent regulator and insurer of federally insured credit unions.

The NCUA administers the National Credit Union Share Insurance Fund (NCUSIF). This fund provides deposit insurance coverage to members of federally insured credit unions, similar to how the FDIC insures bank deposits.

COVERAGE LIMITS

Both the FDIC and NCUA provide the same standard coverage limit of $250,000 per depositor, per insured institution, for each account ownership category. The types of accounts covered by the NCUA and FDIC are similar, including savings accounts, checking accounts, money market accounts, CDs and retirement accounts.

FDIC and NCUA Insurance Coverage Across Multiple Accounts

FDIC and NCUA insurance covers multiple accounts you hold at the same bank as long as the total balance across those accounts doesn't exceed the $250,000 limit for each ownership category.

For example, if you have a $100,000 checking account and a $150,000 savings account at the same bank under your name (single ownership), both accounts would be fully insured because their combined $250,000 balance falls within the coverage limit.

Here are the FDIC and NCUA ownership categories and insurance limits:

Ownership Category	Coverage Limit
Single Accounts	$250,000 per depositor
Joint Accounts	$250,000 per co-owner
Revocable Trust Accounts	$250,000 per beneficiary
Irrevocable Trust Accounts	$250,000 for the trust
Certain Retirement Accounts	$250,000 per owner
Employee Benefit Plan Accounts	Up to $250,000 for the noncontingent interest of each participant

FDIC and NCUA Insurance Limits and Coverage

Here are some scenarios to help you understand the limits of FDIC and NCUA coverages.

SCENARIO 1: ONE ACCOUNT HELD IN A SINGLE ACCOUNT AT BANK A

Jane holds a single checking account with $200,000 in Bank A.
Jane's deposit of $200,000 falls within the $250,000 limit per depositor in a single account category.

Jane's entire deposit of $200,000 is fully covered by FDIC insurance.

SCENARIO 2: MULTIPLE ACCOUNTS HELD IN SINGLE ACCOUNTS AT BANK B

Lucy holds a single checking account with $50,000, a single savings account with $200,000 and a single CD account with $50,000, all of which are held in Bank B.
Lucy’s combined deposits amongst her three single accounts total $300,000 and are held in Bank B.

If her bank were to fail, Lucy could lose $50,000 because the FDIC would cover only up to $250,000 in a single account category.

SCENARIO 3: JOINT ACCOUNT CO-OWNERS HELD AT BANK C

Jim and Sarah are joint owners of a savings account with a balance of $400,000 in Bank C.
Each co-owner is entitled to $250,000 coverage per depositor in a joint account category.

Although the total balance of $400,000 exceeds the individual limit, each co-owner is separately insured up to $250,000.

The $250,000 deposit insurance limit applies to all accounts in the same ownership category at a single bank or credit union. Different account ownership categories, such as joint accounts, revocable and irrevocable trust accounts and certain retirement accounts, are covered by separate insurance programs.

This means that individuals can have more than $250,000 insured at one bank or credit union by distributing their money across different account types.

How the FDIC and NCUA Respond to Bank Failures

In the event of a bank failure, the FDIC or NCUA will ensure the protection of depositors' funds by swiftly taking the following steps:

1
Fund Transfer
The FDIC or the NCUA will organize the transfer of depositors' funds to another insured bank or credit union, minimizing disruption and ensuring continued access to funds.
2
Issuing Checks if Needed
If direct transfers are not feasible, they issue insurance checks to depositors, allowing them to recover their insured deposits quickly.
3
Liquidation
They may liquidate the failed institution’s assets to recover funds.

What FDIC and NCUA Insurance Doesn't Cover

Understanding what the FDIC and NCUA cover is essential, as is understanding what is out of bounds.

Higher Deposit Amounts

FDIC and NCUA insurance is capped at $250,000 per depositor, per FDIC-insured bank or NCUA-insured credit union, per ownership category. Deposits exceeding this amount in a single bank or ownership category are not covered by FDIC or NCUA insurance.

Uninsured Financial Products

Certain financial products fall outside FDIC and NCUA coverage. These include:

Deposits in brokerage accounts
Safe deposit box contents
Stocks, bonds and securities, including money market funds and insurance products. These investments are typically protected by the Securities Investor Protection Corporation (SIPC).

INVESTMENT LOSSES IN YOUR RETIREMENT ACCOUNT

Note that deposit insurance does not protect you from asset losses due to market fluctuations impacting your IRA accounts, including stocks, bonds, mutual funds or other securities.

Recovering Deposits Exceeding Insurance Limits

If you have deposits held at a bank or credit union that exceed the insurance limits provided by the FDIC or NCUA, the process of recovery can take several years. If a bank or credit union fails, the institution sells off its assets and starts making periodic payments to depositors. During this reimbursement process, funds exceeding the insurance limits are repaid on a cents-on-the-dollar basis.

FAQ About Deposit Insurance

Understanding FDIC and NCUA insurance is essential for consumers to ensure financial security and make informed decisions. We answer some of the most common questions about deposit insurance here.

What is the purpose of the Federal Deposit Insurance Corporation (FDIC)?

The FDIC's primary role is to keep the overall financial system stable and ensure public confidence in banks by insuring certain deposits.

How does FDIC insurance work?

FDIC insurance protects depositors' funds if a bank fails, ensuring they will not lose their insured deposits up to the specified limits.

How much does FDIC insurance cover per account?

The FDIC provides insurance coverage of up to $250,000 per depositor, per insured bank, for each ownership category.

How does FDIC insurance work for joint accounts?

In joint accounts, each co-owner is insured up to $250,000, resulting in a total coverage of $500,000 for the joint account. The shares of every joint account that he or she owns at the same insured bank are added together, and the total is insured up to $250,000.

What happens if you have more than the FDIC limit in the bank?

If you exceed the FDIC coverage limit in a single institution, only the amount up to the limit is protected in the event of a bank failure.

Should you use a bank if it’s not FDIC-insured?

All banking institutions in the U.S. that are considered banks are required to be insured by the FDIC. Note that credit unions are insured by the National Credit Union Administration (NCUA). So, while not all financial institutions are insured by the FDIC, all banks and credit unions in the U.S. are required to have deposit insurance through either the FDIC or the NCUA.

What products are not insured by the FDIC?

FDIC insurance does not cover investment products such as stocks, bonds, mutual funds, annuities or other investment securities held in deposit accounts.

Can you have more than $250,000 insured at one bank?

Yes, you can have more than $250,000 insured at one FDIC-insured bank by spreading your money across different account ownership categories, such as single accounts, joint accounts, trust accounts and certain retirement accounts.

What happens if your bank fails and you have uninsured deposits?

If your deposits exceed the FDIC insurance limits and your bank fails, the excess uninsured amount may be partially recovered through the sale of the failed bank's assets. However, without taking steps to insure excess deposits, there is no guarantee of full recovery for the uninsured deposits.

About Alvin Yam, CFP

Alvin Yam is a certified financial planner (CFP) with over 15 years of experience working with individuals and corporations. Before founding Paraiba Wealth Management, he was a director at HSBC and a financial consultant at Charles Schwab. Yam is MoneyGeek's expert consultant on wealth management and personal banking.

Yam earned his bachelor's degree in political science from the University of California, San Diego, and his Master of Business Administration from Loyola Marymount University.

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sources

Federal Deposit Insurance Corporation (FDIC). "Your Insured Deposits." Accessed October 30, 2024.
National Credit Union Administration (NCUA). "Frequently Asked Questions About Share Insurance." Accessed October 30, 2024.

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What Is Deposit Insurance and Why Does It Matter?