FDIC Insurance Coverage Explained: Limits, Rules, and Protecting Your Deposits
- Travis Tsukayama, CFP® CFA
- 3 days ago
- 6 min read
Image Credit | Andrii Zastrozhnov | Adobe Stock
Picture this:
Mary just turned 70 and is happily retired. She lives off her pension and Social Security benefits. Mary is a careful spender and as a result, has a lot of cash saved at her local bank in a high yield savings account and CDs. Each month she discovers her cash balance at the bank increases, recently reaching a total of $300,000. She is proud of her decision to save more than she spends, especially because she wants to leave a legacy for her niece and nephew after she passes away.
The title of today’s blog may have given it away, but is there a problem with this scenario?
From a risk management standpoint, there may be.
One of the keys to wealth preservation is limiting your exposure to the risk of losing money.
It’s wonderful that Mary has hundreds of thousands of dollars saved at the bank.
But what happens if her bank fails?
The Federal Deposit Insurance Corporation (FDIC) exists to provide an answer to that question and in the process, bring stability and public confidence to the American financial system.
Image Credit | Pefkos | Adobe Stock
Having your bank fail is an outcome totally out of your control. The bank insurance provided by the FDIC is primarily intended to protect customers’ money in the event of a bank failure. A second and often overlooked benefit it provides is to return the customers’ money expeditiously and avoid any interruption to accessing their funds.
Even with the FDIC providing a financial backstop for bank customers, you must understand its guidelines and set up your accounts properly to receive full coverage. Done incorrectly, you open yourself up to the risk of tremendous financial loss if your bank fails.
Experiencing a financial loss of that magnitude can impact your retirement plan and slash the legacy planned for your heirs. Fortunately, this negative outcome can be totally avoided by knowing how FDIC coverage works and how to set up your bank accounts to minimize your risk.
In today’s post, we’ll learn:
The coverage limits of FDIC bank insurance and how to ensure your money is fully covered
What assets are covered and what is not covered
Whether your deposits are insured if you bank at a credit union
What FDIC Insurance Covers and Why It Matters
Image Credit | ArLawKa | Adobe Stock
When the world needed it most, the FDIC was there.
From 2008 to 2013, over 500 banks in the United States failed due to the economic contraction caused by the Great Financial Crisis. Many regional and community banks folded due to the turbulence.
During that period, however, bank customers of the failed institutions did not lose a penny of their FDIC-insured deposits. The insurance worked as intended and brought stability to the financial system when it was sorely needed.
Let’s break down how the coverage works.
FDIC Coverage Limits Per Depositor Explained
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From their website: The FDIC “insures deposits to at least $250,000 per depositor, per ownership category at each FDIC-insured bank.”
When I first learned about FDIC insurance coverage limits I read that sentence three times and still didn’t understand it.
The dollar limit is clear. $250,000 of coverage per depositor. That means a single owner checking account at Bank A receives $250,000 of coverage. A joint account with two owners qualifies for an additional $250,000 of coverage for a total of $500,000.
Going back to Mary in our example, she has $300,000 deposited in high yield savings accounts and CDs as a single account owner. Assuming the account is in her name and she doesn’t have any beneficiaries designated, she is over the $250,000 limit of FDIC coverage. If her bank fails, the insurance would not cover $50,000 of her money - a significant loss.
How To Maximize FDIC Insurance Across Multiple Banks
Next, the insurance applies at each FDIC-insured bank. Having some of your money in Bank A and some in Bank Z means you have separate coverage at each institution.
Example:
Sara has $150,000 deposited in a CD at Bank Kelce and another $150,000 deposited in a CD at Bank Swift. Since both banks are FDIC-insured and separate institutions, Sara qualifies for $250,000 of coverage at each bank for a total of $500,000.
FDIC Coverage by Account Ownership Category
Questions usually come up regarding “per ownership category”. The FDIC defines 12 ownership categories, but most people will use one or more of the following account types:
Single accounts
Joint accounts
Certain retirement accounts (Traditional IRA, Roth IRA, SEP IRA)
Revocable Living Trusts
Irrevocable Living Trusts
Employee benefit plan accounts
Business/Organization accounts
This means that a customer can have a checking account only in their name, a joint checking account with their spouse, and a retirement account in their name at one bank with separate FDIC coverage for each. Based on this example, how much coverage do they qualify for?
Single checking account - $250,000
Joint checking account - $500,000 (two owners)
Retirement account IRA - $250,000
= $1 million in FDIC coverage across their three accounts
Additional Coverage Per Designated Beneficiary
If you have your bank account titled in your revocable living trust or have designated the account “Payable on Death” to named beneficiaries, the limits are slightly different.
In this case, your deposits are insured up to $250,000 per beneficiary, up to a maximum of $1,250,000 of coverage.
Example:
Mike has a checking account titled in his revocable living trust. His trust names three beneficiaries.
3 x $250,000 = $750,000 of FDIC-insurance coverage
Getting back to Mary in the first example, what can she do to address the risk of her assets not being totally covered by FDIC bank insurance?
Mary wants to leave some of her assets to her niece and nephew when she passes away.
She can name them as beneficiaries on her accounts at the bank. Since FDIC coverage is calculated per beneficiary, naming two beneficiaries directly on the account as “Payable on Death” increases her coverage from $250,000 to $500,000.
If she has a trust, she can also re-title the account in the name of her trust. The coverage will be increased based on the number of beneficiaries named in her trust to a maximum of $1,250,000 of total coverage.
I’ve had clients open checking accounts at different banks to keep their balances below the FDIC threshold using the “per bank” strategy. It works to stay under FDIC limits, but it’s another account to keep track of. If keeping your finances simple is the goal, consider adding beneficiaries to existing accounts to stay within FDIC coverage.
Frequently Asked Questions: FDIC Insurance Coverage
What Assets are Covered by FDIC Insurance?
Checking accounts
Savings accounts
CDs
Money market deposit accounts
Negotiable Order of Withdrawal (NOW) accounts
Cashier’s checks and money orders
You’ll want to make sure your bank is insured by the FDIC. Most banks are, but it’s good to double check: https://banks.data.fdic.gov/bankfind-suite/bankfind
Money in the categories above are covered by the FDIC. If the bank fails, the risk comes from account balances exceeding coverage limits.
It’s equally important to know what deposits are NOT covered by the FDIC.
What Assets are NOT Covered by FDIC Insurance?
Stock investments
Bond investments
Mutual funds / Exchange Traded Funds
Annuities
Life insurance products
US treasury bills, notes, bonds
Safe deposit boxes and their contents
Crypto assets
Municipal securities