Whether it’s your paycheck or a tax refund, you want to feel safe when you deposit money in your bank account. But with all the talk of bank failures during 2023, how safe are banks—and what happens if yours fails?
Here’s the good news: In the improbable event of that happening, the Federal Deposit Insurance Corporation (FDIC) has your back.
What is FDIC insurance?
FDIC deposit insurance protects bank customers should an FDIC-insured financial institution fail. The typical insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. And the good news: You and your bank doesn't have to apply for FDIC insurance—this coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution.
A quick history lesson
Congress established the FDIC by passing The Banking Act of 1933 in response to a mass of bank failures during the Great Depression. Between 1929 and 1933, 9,000 banks suspended operations, causing customers to lose billions. What started as $2,500 in insurance coverage per depositor is now up to $250,000 per depositor per FDIC-insured institution.
Since its inception, the FDIC has helped consumers in the rare instance of bank failure. From the 2008 Washington Mutual Bank failure (the largest in U.S. history) and, more recently, the First Republic Bank, Silicon Valley Bank, and Signature Bank failures in 2023, consumers haven’t lost a dime on insured funds. And hopefully, you didn’t bank at one of those institutions, but FDIC insurance would have assured your savings were safe if you had.
How does FDIC insurance work?
Unlike your car insurance, where you pay a monthly premium, there’s no cost to ensure that FDIC insurance protects your bank accounts. Instead, your bank pays the FDIC insurance premiums. "If your bank fails, FDIC insurance will ensure you receive [your] funds, up to the insurance limits, typically within a few business days," says Nick Holeman, a certified financial planner and Head of Financial Planning at Betterment, a financial services company offering FDIC-insured bank accounts.
Should a bank fail, the FDIC assumes control of the bank. Then, they arrange a sale of the bank's assets, typically to a larger, more stable bank or by directly reimbursing depositors up to the limit for each insured account. So, what happens if you have more in your account than is covered by FDIC insurance? “They have to wait until the bank's assets have been sold off to recoup the additional funds,” says George Acheampong, a financial advisor and founder at Capitalwize, a financial planning firm.
For example, Silicon Valley Bank (SVB) officially collapsed on March 10, 2023. The FDIC took control of SVB under a new temporary bank called the Deposit Insurance National Bank of Santa Clara (DINB), and depositors had access to their money by March 13, 2023. By March 26, the FDIC had sold SVB’s assets to First Citizens Bank. The FDIC moves fast to protect consumers and their funds.
FDIC insurance limits
As mentioned before, the standard FDIC deposit insurance coverage is $250,000 per depositor, bank, and ownership type. A deeper dive into what this means can help you understand each and ensure you get the most from your FDIC coverage.
Per depositor, per banking institution
The short story: Your accounts are insured up to $250,000 per bank.
The longer story: As an individual account holder, you’re FDIC insured for up to $250,000 at each bank where you have an account. For example, if you have $200,000 at Bank A and $200,000 at Bank B, you’d be covered for all $400,000.
Per ownership title
The short story: You’re insured for up to $250,000 per depositor, per bank, and per account ownership category.
The longer story: If you have multiple accounts at a single bank with different ownership titles—like a combination of individual and joint accounts—you’re FDIC insured up to $250,000 per account, bank, and ownership type. Eligible title categories include joint accounts (two or more owners), trust accounts, or individual accounts (one owner). Here’s how this looks in action:
- You have an individual savings account at Bank A with a balance of $240,000.
- You also have a joint account with your spouse at the same bank with a balance of $290,000.
In this case, you and your spouse have a total of $530,000 at Bank A. If Bank A were to fail, both accounts would be fully insured. Your individual savings account is under the $250,000 limit, so you’re good there. Your joint account would also be fully covered because two depositors are insured for $250,000 each, for a combined total limit of $500,000.
For most people, $250,000 in deposit insurance is enough to sleep peacefully at night, but those with more cash assets might not be at ease quite yet.
"Individuals and financial companies can get creative," says Holeman. "One way to increase FDIC limits is to spread your money across multiple banks. Individuals can do this themselves, or financial companies can do this for their customers, making it easier for the end users."
In the wake of the 2023 bank failures, some banks now offer customers more FDIC insurance than the standard $250,000—up to $2 million in some cases with bank accounts at SoFi, Wealthfront, and Betterment. To offer these higher insurance limits, banks divvy up your deposits of over $250,000 between partner banks, which keeps you fully insured, albeit at multiple financial institutions.
There’s one additional way to boost your per-account FDIC insurance limit, though it’s typically only used as part of estate planning. Per FDIC rules, you can add up to five beneficiaries to your account if you designate your account as payable on death (POD). While your beneficiaries won’t get the money until you die, they’ll be insured for $250,000 each, bringing your account’s total FDIC-insured balance to $1.25 million.
What’s covered by FDIC insurance?
If you’re wondering what’s covered by FDIC insurance, think bank accounts—the types you’ll find at nearly every bank, including:
- Savings accounts
- Checking accounts
- Money market accounts
-
Certificates of deposit (CDs), including
- Shorter-term CDs, like 6-month and 1-year CDs
- Longer-term CDs, like 3-year and 5-year CDs
If you’re ever curious whether an account at your bank is FDIC-insured, speak with a customer service specialist. And if you bank at a credit union, your accounts are insured by National Credit Union Administration insurance, which has limits identical to the FDIC.
What’s not covered by FDIC insurance?
FDIC insurance covers specific account types and types of losses. First, a bit on the losses.
The FDIC steps in when a bank fails. It doesn’t cover “losses” like bank fees or CD early withdrawal penalties charged to your account. Its coverage is also limited to bank deposits in accounts like the types listed above. That means several popular account types aren’t covered by FDIC insurance, including:
- Brokerage accounts
- Including assets like stocks, bonds, and mutual funds
- Retirement accounts like 401(k)s and IRAs
- Cryptocurrency accounts
- Life insurance policies
- Savings bonds
While the FDIC may not insure the investment and insurance products listed above, the Securities Investor Protection Corporation (SIPC) may offer some level of protection, depending on the asset type. SIPC protects you against the loss of cash and securities, like stocks, bonds, and mutual funds, if a SIPC-member brokerage collapses. The limit for SIPC protection is $500,000, with $250,000 allowed in cash. Unfortunately, cryptocurrency accounts are not currently protected under the FDIC or SIPC.
Remember that insurance protection isn’t the only factor to consider when choosing a bank. "FDIC insurance is important," adds Holeman. "But so is your interest rate that your cash earns. Savvy investors will also make sure their cash is working for them."
How to tell if you’re covered
Thankfully, there’s a handy tool to help calculate how much of your deposits are protected by insurance. The FDIC Electronic Deposit Insurance Estimator (EDIE) offers reminders on the types of covered accounts and coverage limits. It’s also up-to-date on the latest rules for revocable and irrevocable trust accounts—especially helpful for those using a trust for estate planning.
The takeaway
The FDIC has a long and successful history of protecting depositors for nearly 90 years. What started as just $2,500 in deposit insurance has grown over time as our financial system became more complex but remains one of the most essential cornerstones in the U.S. banking system.
While many investors won’t ever have to worry about having cash in the bank that exceeds FDIC insurance limits, those who do have options to ensure they’re protected. You can look for banks that offer additional FDIC insurance or divide your assets across multiple banks to ensure you receive the maximum insurance for all accounts.
