What Is FDIC Insurance?
The Federal Deposit Insurance Corporation (FDIC) is a government agency that serves to safeguard the U.S. financial system. Congress created the FDIC in 1933 as a response to the banking crisis of the late 1920s, which wiped out many Americans’ life savings and sparked the Great Depression.
The primary component of the FDIC’s mission is its insurance program, which protects deposits at insured depository institutions (IDIs), such as banks and savings associations. If an IDI were to fail, the FDIC’s insurance gives customers timely access to their insured deposits up to a certain amount.
FDIC insurance covers the money held in deposit products at banks and savings associations, including checking accounts, savings accounts, money market accounts and certificates of deposit (CDs). The insurance does not cover non-deposit investment products such as annuities, stocks and bonds.
How Does FDIC Insurance Work?
FDIC insurance is designed to protect bank customers if a bank fails. It doesn’t happen very often, but financial institutions like banks can take on too much risk and eventually fail, which puts the assets of the bank’s customers in jeopardy.
If this happens to a bank that’s insured, the FDIC will reimburse the bank’s account holders for their deposits up to the limit of $250,000 per account holder. This limit is per depositor, per ownership category the account falls under.
- Single Accounts
- Including checking accounts, savings accounts, certificates of deposit and money market accounts.
- Certain Retirement Accounts
- Including IRAs and 401(k)s.
- Joint Accounts
- Deposit accounts owned by two or more individuals.
- Revocable Trust Accounts
- A revocable trust — like a living trust account — can be revoked, terminated or changed at the direction of the owner(s).
- Irrevocable Trust Accounts
- The owner of an irrevocable trust contributes deposits to the trust account but gives up all power to cancel or change the trust.
- Employee Benefit Plan Accounts
- Including pension plans, defined benefit plans or other employee benefit plans that are not self-directed.
Example FDIC Deposit Account Ownership Categories
How Much Are CDs Insured For?
The FDIC sets a limit of $250,000 for federal deposit insurance coverage. Coverage is automatic when you open a deposit account at an FDIC-insured bank or financial institution.
This means $250,000 is the limit for all the single accounts a person has at an institution combined. So, if you have $50,000 in a savings account at the same bank that holds your CD, the FDIC will insure your CD for up to $200,000.
Examples of How CDs Are Insured by the FDIC
To better understand the way CDs are covered by FDIC insurance, let’s look at a few examples.
Example One
Let’s say you like to keep all your banking accounts in one place. All at the same bank, you have:
- $50,000 in a checking account
- $150,000 in a savings account
- $100,000 in a CD
That’s a total of $300,000 in single accounts. In the event of your bank failing, you could stand to lose $50,000 because the FDIC would only cover these deposits up to $250,000.
Example Two
If you hold more than $250,000 in insurable products, you can get around the limitations of FDIC coverage by diversifying your CD portfolio with CDs from different banks. For example, if you had:
- $50,000 in a checking account at Bank A
- $200,000 in a CD at Bank A
- $50,000 in a savings account at Bank B
- $150,000 in a CD at Bank B
In total, you would have $250,000 in deposit products at Bank A and $200,000 in deposit products at Bank B. Because FDIC insurance covers up to $250,000 per account holder per bank, you’d be covered for the total amount of your money in both banks.
Understanding how to keep your deposits safe is a crucial component of financial literacy because it means you’re protected against potential pitfalls — like your bank or financial institution failing.
Related CD Insurance Questions
In general, if your money is in a national bank with branches across the country, it’s probably FDIC insured. Some smaller banks, such as state banking institutions, may not be insured by the FDIC and instead are insured by the state. Foreign banks are also not eligible for FDIC insurance.
The FDIC is required by federal law to disburse insured funds “as soon as possible” after the failure of an IDI. Each case is unique, but the FDIC says its goal is to issue deposit insurance payments within two business days of the institution’s failure.
If the amount of money lost exceeds the limit of $250,000, the depositor receives a deposit insurance payment for the $250,000 covered by the insurance. The depositor also receives a claim against the estate of the closed bank for the amount over the limit. With this claim, the depositor may be able to receive payments for the amount lost as the assets for the bank are liquidated.
Two types of CDs have special provisions for FDIC insurance. An index-linked CD allows the owner to generate interest based on the appreciation of a stock index, such as the S&P 500. The principal amount deposited in this type of CD is FDIC insured, but any interest generated during the term of the CD is the responsibility of the issuing bank.
Another type of CD, called a brokered CD, may not be insured by the FDIC. This product may be offered by a stockbroker who serves as a deposit broker for the issuing bank. Brokered CDs pay a higher rate of interest than typical CDs, but they usually require a minimum deposit amount and sometimes a fee to purchase one. Most of these CDs are considered deposit products, and therefore are FDIC insured, but some are considered securities, which are not insured by the FDIC.
Because the FDIC insurance covers CDs up to $250,000 and the limit can be surpassed by holding CDs at multiple insured banks, there isn’t a market for other types of CD insurance. You can feel confident that your deposit is protected by federal insurance.
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