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The Federal Deposit Insurance Corporation (FDIC) is a regulatory agency that provides deposit insurance coverage for depositors with eligible bank accounts. Nearly all banks operating in the United States have FDIC insurance. The insurance is a guarantee that all insured deposits will remain safe even if your financial institution becomes insolvent.FDIC insurance can typically protect your single checking or savings account deposits up to a maximum $250,000 limit if your bank goes out of business (officials made an exception to the $250K limit in March 2023 amid two bank failures). The FDIC can give you access to your insured deposits within days of a sudden bank failure. Below we highlight how FDIC insurance works.How Does FDIC Insurance Work?
FDIC insurance works like a financial safety net in the event that an FDIC-insured bank goes out of business. State and federal regulators may close a bank if they determine the bank is illiquid, insolvent, and unable to safely conduct its depository business.The insurance will kick in if the FDIC becomes the receiver of a failed bank that operated as an FDIC member. The FDIC may create a bridge bank or Deposit Insurance National Bank (DINB) whenever any FDIC-insured bank fails. Using this power, the FDIC may take over a failed bank’s assets and provide customers with access to their insured deposits within days of the bank’s collapse.FDIC insurance typically covers the principal deposit amount and any annual percentage yield earnings up to the $250,000 FDIC limit. The average interest rate on a savings account is 0.35% APY as of Feb. 21, 2023, according to data posted on the FDIC website.Why Does FDIC Insurance Exist?
Congress created the FDIC in the 1930s to help restore confidence in the troubled banking system that existed at that time. Amid thousands of Great Depression-era bank failures, then-President Franklin D. Roosevelt signed legislation in 1933 formally establishing the FDIC. The agency since then has provided a deposit insurance safety net.A bank can become an FDIC-insured depository institution by submitting a deposit insurance application to the appropriate regulatory agencies and paying the insurance premiums. Nearly all commercial banks and savings institutions in the United States are FDIC-insured. There were 4,706 FDIC-insured institutions operating as of Dec. 31, 2022, data show.Bank customers don’t need to apply for FDIC insurance. You are automatically covered if you open a bank account at an FDIC-insured institution. As mentioned above, nearly all banks in the United States offer deposit accounts featuring FDIC insurance coverage. These banks must advertise themselves as FDIC members.What do you need to open a bank account? You may need two forms of identification to open an FDIC-insured bank account, such as a driver’s license and birth certificate.How Does the FDIC Know When a Bank Fails?
State or federal regulators may close a troubled bank if they find the bank has inadequate liquidity and no ability to pay its obligations. Whenever an FDIC-insured bank fails, the FDIC is summoned as a receiver to take over the failed bank’s assets. The FDIC can then begin the process of providing depositors with access to their insured deposits.The FDIC works closely with other regulators and can generally respond quickly if and when an FDIC-insured bank becomes insolvent. A bank may become insolvent if it has insufficient capital and its customers withdraw their deposits en masse — a phenomenon known as a run on the bank.Recommended: How Do Banks Make Money and Generate a Profit?What Does FDIC Insurance Cover?
The following types of bank accounts may receive FDIC insurance coverage:FDIC insurance may also cover a number of monetary instruments, including outstanding cashier’s checks and money orders issued by a bank. Depositors can open multiple bank accounts, and any commercial bank or savings institution operating with FDIC insurance is required to advertise itself as a Member FDIC institution.Recommended: How Much Money Do People Keep in Their Checking and Savings Accounts?What Is Not Covered By FDIC Insurance?
The following assets are typically not covered by FDIC insurance:- Annuities
- Bonds
- Life insurance policies
- Municipal securities
- Mutual funds
- Safe deposit boxes or their contents
- Stocks
- U.S. Treasury bills, bonds, or notes
What’s the Maximum FDIC Insured Amount?
In general, the standard maximum deposit insurance amount is usually $250,000 per depositor, per insured bank, for each account ownership category. Typical categories include single and joint bank accounts. FDIC insurance may cover the following ownership categories:- Corporation, partnership, or unincorporated association accounts
- Eligible retirement accounts
- Employee benefit plan accounts
- Government accounts
- Joint accounts
- Revocable and irrevocable trust accounts
- Single accounts
Deposits of up to $250,000 in a single checking account can typically receive FDIC insurance coverage automatically. Customers with a two-person joint savings account can typically be fully insured for up to $500,000. Deposits in a revocable trust account naming three unique beneficiaries can usually be insured up to $750,000.Some banks participate in programs that extend the FDIC insurance to cover millions.Recommended: Checking vs Savings Account DifferencesIs There an Exception for Protecting Uninsured Deposits?
There’s no guarantee that FDIC insurance will cover uninsured deposits. If an FDIC-insured bank fails, uninsured depositors may never get their money back in full unless Congress intervenes or regulators invoke a systemic risk exception.When regulators closed two banks in March 2023, the U.S. Department of the Treasury, Federal Reserve, and FDIC issued a joint statement saying all depositors of those failed banks — including uninsured depositors — would be made whole.What’s an uninsured deposit? Uninsured deposits at an FDIC member bank are typically any amount of deposits that exceed the FDIC’s standard deposit insurance coverage limit.Uninsured depositors can receive full government protection if Treasury, Fed, and FDIC officials agree to do so under the systemic risk exception following the closure of a bank. Aside from this, Congress could pass legislation protecting uninsured depositors, or a solvent bank could buy a failed bank’s assets and make all depositors whole.The Takeaway
Depositing funds into an FDIC-insured bank account can provide some protection and peace of mind. Depositors have ownership rights and capacities to maximize their FDIC insurance coverage across different accounts. You can typically receive up to $250K in deposit insurance coverage with a single savings account or $500K of coverage with a two-person joint account.If you’re looking to earn interest on your savings, Lantern by SoFi can help. Our online banking marketplace allows you to compare APYs and choose an FDIC-insured bank account that’s right for you.Compare high-interest savings accounts with Lantern. Photo credit: iStock/AndreyPopov
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About the Author
Sulaiman Abdur-Rahman
Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
