What Is Deposit Insurance and Why Does It Matter?

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ByAlvin Yam, CFP
Edited byCasie McCoskey
ByAlvin Yam, CFP
Edited byCasie McCoskey

Updated: May 16, 2024

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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.

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How FDIC Insurance Works

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

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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

FDIC and NCUA Insurance Limits and Coverage

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

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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.

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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.

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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.

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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)?
How does FDIC insurance work?
How much does FDIC insurance cover per account?
How does FDIC insurance work for joint accounts?
What happens if you have more than the FDIC limit in the bank?
Should you use a bank if it’s not FDIC-insured?
What products are not insured by the FDIC?
Can you have more than $250,000 insured at one bank?
What happens if your bank fails and you have uninsured deposits?

About Alvin Yam, CFP


Alvin Yam, CFP headshot

Alvin Yam is a certified financial planner with over 15 years of experience working with individuals and corporations. He is an expert in wealth management and personal banking. Alvin is also the Founder and Managing Partner at Paraiba Wealth Management, an independent registered investment advisor.

Prior to founding Paraiba, Alvin spent five years as a Director at HSBC overseeing retail and wealth products, and was also a Financial Consultant at Charles Schwab, advising clients on investments, retirement planning and banking products.


sources
Shield Insurance

The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.