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How Does FDIC Insurance Actually Work?

Banking, Banking Basics
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Banks are safe and stable places to store your money. Still, the past several years have reminded us that these institutions can fail, meaning they can no longer meet their obligations to the people who have deposited money with them or to those they’ve borrowed from.

In these rare cases, your money is protected as long as a bank is federally insured. That means backing by the Federal Deposit Insurance Corp. (Credit unions offer this security as well, through the National Credit Union Administration.)

Here’s a look at what the FDIC is, what it covers and how it guards your hard-earned money.

The idea behind FDIC insurance

The FDIC was established in 1933 in response to the many bank failures during the Great Depression. It was meant to (and still does) promote public confidence in the banking system by insuring consumers’ deposits. In 2015, eight banks failed, but during the Great Recession, dozens went under. Still, since the creation of the FDIC, not one cent of insured deposits has been lost.

Banks are not insured by default; like most forms of insurance, it comes at a cost. But you don’t pay a monthly fee, nor do your tax dollars foot the bill. The bank pays the premiums.

The FDIC insures up to $250,000 per depositor, per institution and per ownership category. FDIC insurance covers deposit accounts — checking, savings and money market accounts and certificates of deposit — and kicks in only in the event a bank fails. Losses incurred from investments are not covered, even if they were purchased from an insured bank. FDIC insurance also does not cover contents of a safe deposit box housed at a bank.

» MORE: How to choose a bank

The limits of coverage

What does it mean to be covered “up to $250,000 per depositor, per institution and per ownership category”?

Consider an example: You’re single and do your banking in one place. You have $50,000 in a checking account, $100,000 in a savings account and $200,000 in CDs, for a total of $350,000 in deposits. But that’s one depositor (you), one institution (your bank) and one ownership category (single), and so if your bank failed, you would lose $100,000 because in this situation the FDIC would cover only up to $250,000.

 DepositsFDIC Coverage (up to $250,000)
Checking account$50,000$50,000
Savings account$100,000$100,000
CDs$200,000$100,000
Uninsured funds

$100,000

Don’t fret, though, because the next-most important thing to know about FDIC coverage is that you can be insured for much more depending on where you keep your accounts and how they are owned.

» MORE: How to choose a bank account

How to maximize your coverage

One way to make sure all of your money is insured is to spread it across multiple institutions. Let’s consider a new example: You’re still single, but now you have $250,000 at one bank and $250,000 at another bank. All of your money is protected in this scenario.

 DepositsFDIC Coverage (up to $250,000)
Bank No. 1$250,000 in checking and savings$250,000
Bank No. 2$250,000 in CDs$250,000
Uninsured funds

$0

“Ownership category” refers simply to who owns the account. The easiest distinction is between “single,” meaning an account for just one person, and “joint,” meaning an account shared by two or more people. Other kinds of ownership categories include certain retirement accounts, such as IRAs, trust accounts and employee benefit plan accounts.

Here’s one more example to show how different ownership categories affect how your money is insured: You’re married, and at a bank you have $500,000 in a joint savings account shared with your spouse and $250,000 in a CD in your name. All of this money is protected. How? The joint savings account is one ownership category, where both you and your spouse are covered up to $250,000. The CD is a second ownership category (single) where you are covered up to that amount.

 DepositsFDIC Coverage (up to $250,000)
Single account$250,000 in CDs$250,000
Joint account$500,000 in savings$500,000 ($250,000 each)
Uninsured funds

$0

There are too many combinations to cover them all here. Just know that you have options to make sure all of your money is insured.

» MORE: When to consider a joint bank account

How to get your money back

When a federally insured bank fails, the FDIC will try to sell deposits and loans from the failed institution to a solvent one. If a sale is successful, customers’ accounts are simply transferred.

When no sale can be made, customers from the failed institution will receive checks from the FDIC for the insured balances of their deposits, usually within a few days of a bank’s closing.

Customers will receive notice by mail if the FDIC requires further actions to redeem deposits.

Next steps

To find out whether your deposits are federally insured, search for your bank on the FDIC’s BankFind tool. And spread your money across multiple banks or credit unions so that you do not bump up against or exceed the $250,000 limit at any one institution.

Melissa Lambarena is a staff writer at NerdWallet, a personal finance website. Email: mlambarena@nerdwallet.com. Twitter: @LissaLambarena.

Updated Aug. 24, 2016.