Federal Deposit Insurance Corporation (FDIC) protects consumers and reimburses depositors when a bank fails.
Federal Deposit Insurance Corporation (FDIC) insurance covers chequing, savings, and other deposit accounts up to a standard amount of $250,000 however, the limit applies per depositor, not per account.
Banks are a safe place to deposit money and save for future expenses. If a bank becomes insolvent and can’t return the consumer money, that’s when FDIC Insurance comes in to help.
FDIC was a result of the Great Depression in 1933 when many of the US banks failed. It is an independent agency of the U.S. government which was established to reinstate public confidence in the banking system. It continues to play its role effectively by insuring consumers’ deposits.
FDIC is like normal insurance however, you don’t have to pay the premium or any fees, it’s the banks who pay. FDIC is completely managed, overseen, and guaranteed by the Federal government.
When you deposit money in a bank account, the bank invests it by providing loans to customers. It pays you a small interest for your deposits. However, if a bank loses too much money on its investments, it may become insolvent. The bank no longer carries enough assets to fulfil the requirements of its creditors and depositors.
If a bank fails, FDIC notifies all the depositors in writing and then takes action. First, it pays out funds to depositors for up to the insured amount limit. Second, the FDIC collects or sells the remaining assets of the bank and settles the debtors. With this process, FDIC ensures that the consumers receive seamless and prompt access to the insured deposits.
FDIC Insurance covers all types of deposit accounts up to $250,000
FDIC insures many common deposit accounts but it doesn’t cover investment accounts. Covered accounts include savings and chequing accounts, certificate deposits, negotiable order of withdrawal accounts, money market deposit accounts, money orders, cheques, and various other financial items that are issued by a bank.
Accounts that don’t qualify for FDIC Insurance are mutual funds, life insurance policies, stock investments, bonds, municipal securities, and safe deposit boxes
The standard coverage limit is $250,000 per account owner and per ownership category.
If a depositor has $70,000 in the chequing account, $210,000 in a savings account and does banking at a single bank, this means the total amount of deposit is $280,000. If in any case, the bank fails, the depositor would lose $30,000, because FDIC only covers up to $250,000.
However, you can qualify for more than the insured limits if you hold accounts in more than one category.
Single Accounts has a coverage limit of $250,000 per owner; joint accounts, $250,000 per owner; selected retirement accounts, $250,000 per owner; revocable trusts, $250,000 per unique beneficiary; employee benefit plans, $250,000 per plan participant that’s entitled to the account; irrevocable trusts, $250,000 per unique beneficiary that is entitled to the account;
government accounts, $250,000 per official custodian and corporation, partnership, and unincorporated association, $250,000 per corporation, partnership, or unincorporated association.
To maximise your FDIC coverage, you can spread your money in different financial institutions. For instance, you are a single owner and have $240,000 in your chequing account at one bank and a certificate deposit of $200,000 in another bank, all your money is protected as both accounts can be covered by FDIC, which is $250,000 for each account. If a depositor holds a revocable trust account for an instance, it carries one owner but has three unique beneficiaries then you can get the insured amount up to $750,000 which is $250,000 per beneficiary.
Receiving funds from FDIC Insurance
When a bank fails, the FDIC will try to sell deposits and loans from a failed bank to a solvent one. If the sale becomes a success, then the money in customers’ accounts will be transferred automatically. When there is no sale, customers from the failed institution will receive cheques from FDIC for the insured balances of their deposits, within a few days after the bank was closed. Customers will be notified by mail if the FDIC requires further actions to redeem the deposits.