FDIC Insurance: What it is and How to Maximize Coverage.

Reviewed: February 21, 2014
By FinanceWeb

FDIC insurance covers deposit accounts. At the most basic level, any time a person places their money into an FDIC covered bank or other financial institution, their money is insured against the bank failing. That insurance is conditional though, and it’s worth it to take some time to understand what FDIC insurance covers.

Who is the FDIC?

The Federal Deposit Insurance Corporation is an independent government agency. It exists as an insurance agency to banks and as a consumer protection institution. That small notice that many banks and financial institutions put on their products and advertisements that says “FDIC Insured,” means the financial institution has the full backing of the FDIC. So when people deposit their money into one of those banks, they can do it with confidence.

FDIC Insurance Coverage

FDIC insurance mainly covers accounts that have actual cash in them. That’s why it’s also sometimes called deposit insurance. As of 2008, the FDIC insures depositor’s accounts up to a total of $250,000 (US). That means that someone who needs to deposit large sums of money can do so without having to worry about losing it all. This also offers an opportunity for depositors to use many of a bank’s products without fear of losing any of their funds in the process. It’s a good way to maximize the use of their money.

The FDIC covers:

  • Checking accounts
  • Savings accounts
  • Money market deposit accounts (MMDAs)
  • Certificates of Deposit (CDs) and time accounts
  • Some retirement accounts
  • Revocable trust accounts

The FDIC does not cover:

  • Stocks, bonds, mutual funds, other types of investment accounts, securities and insurance products.
  • Safe deposit boxes
  • Treasury bills, notes and bonds

Ownership categories

A good way to leverage FDIC insurance is to understand how ownership categories work. The FDIC insures up to $250,000 (US), per owner, per ownership category, per bank. That means that a person can have up to the maximum amount spread across multiple accounts under one category. They can also have up to the maximum under a separate account category as well.

Ownership categories include:

  • Single accounts
  • Joint accounts
  • Some retirement accounts
  • Revocable and irrevocable trust accounts
  • Government accounts
  • Employee benefit plan accounts
  • Corporation, partnership and unincorporated association accounts

If a person has one of each of these types of accounts at one bank, then each account will have coverage up to $250,000. That means that a person can technically hold up to 2 million dollars at one financial institution. If they can keep $250,000 in all eight account types, they can hold an additional 2 million at each different financial institution that happens to have FDIC insurance. That’s an extreme example, but it should illustrate how someone may take the most advantage of FDIC insurance.

Each account type operates under slightly different rules. A joint account assumes that each account holder owns some of the total. If a joint account has $500,000 in it, then it’s assumed that half belongs to one person and half belongs to the other. So each individual has insurance for his or her half. It’s important that people pay attention the rules that govern each ownership category.

Security Blanket

FDIC coverage is a security blanket that depositors can use to make sure that their money has the safety net it needs to grow and work for them. Customers at financial institutions should use that added security to place their money into the accounts that they need, without fear that they may lose money in those accounts. It’s especially ideal for when people need to store a chunk of money for a large purchase, like a home. They can deposit it knowing that it will still be there for them when they need to use it.