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How FDIC Bank Deposit Insurance Works

Find out which accounts are and aren’t covered, plus the limits on protecting your savings

Outside the entrance to the Federal Deposit Insurance Corporation building
Corbis / Getty Images

You may recall the scene in It’s a Wonderful Life where George Bailey and his bride, Mary, are on their way to their honeymoon when they’re stopped by a run on the Bailey Brothers Building and Loan. The depositors have rushed to get their money out, because before federal deposit insurance, if a bank ran out of money, you ran out of luck — your savings were gone. George uses his honeymoon money and some earnest words to calm down the depositors to stop the run before the bank goes bust.

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Bank runs were no fantasy. During the Great Depression, from the fall of 1929 to the end of 1933, about 9,000 banks failed. And because there was no federal deposit insurance, millions of people saw their life’s savings vanish. To protect investors, and to ensure the soundness of the banking system, Congress created the Federal Deposit Insurance Corporation (FDIC) in 1933 to make sure that savers didn’t pay for the mistakes of bankers.

A historic photo shows people watching as a notice from the Federal Deposit Insurance Corporation is tacked on the door of a failed New Jersey bank in 1939, assuring investors that most deposits are protected.
A notice from the Federal Deposit Insurance Corporation is tacked on the door of a failed New Jersey bank, February 14, 1939, assuring investors that most deposits are protected.
Bettmann / Getty Images

Bank failures are a hallmark of most economic recessions. The recession of 1990–1991 was preceded by about 1,000 failed savings and loans. More than 500 banks failed between 2008 and 2015 as the housing market collapsed.

The banking business has been remarkably stable. Eight banks have collapsed in the past five years, and the most recent bank failure was Almena State Bank in Almena, Kansas, on October 23, 2020. Nevertheless, when the economy weakens, the odds are good that bank failures will rise too. And that’s why it’s good to know how deposit insurance works.

The limits

FDIC insurance covers bank checking accounts, savings accounts, money market deposit accounts and certificates of deposit as well as cashier’s checks and money orders. Deposit insurance doesn’t cover stocks, bonds, mutual funds or other investments purchased through a bank, nor does it cover the contents of safety deposit boxes.

FDIC insurance protects up to $250,000 per depositor, per deposit category, per insured bank. Let’s break that down.

Per depositor. Let’s say you have a checking account and your spouse has a checking account at the same bank. Each account is insured to $250,000, for a total of $500,000. FDIC insurance also covers joint accounts separately; the owners of the account don’t have to be related. Each co-owner is insured for $250,000 for his or her combined interest in all the joint accounts at the institution. A couple could each have personal checking accounts with $250,000 and a joint account with $500,000 at the same bank and be insured for a total of $1 million.

Per deposit category. The FDIC insure 14 different types of deposits. The four most common categories are single accounts, joint accounts, trust accounts and certain self-directed retirement accounts, each insured up to $250,000 for each owner at the same bank. If you have a checking account with $250,000 and an individual retirement account worth $250,000 at the same bank, you’re insured for $500,000.

Per bank. You could have $250,000 at 10 FDIC-insured banks and be covered for $2.5 million. Bear in mind that credit unions are not covered by FDIC insurance; instead, the National Credit Union Administration (NCUA) backs credit union share accounts for $250,000 under similar rules. There are still a few savings and loan institutions, which are covered by FDIC insurance. The FDIC has a handy tool to tell you if they insure your bank, as well as one that tells you how much FDIC coverage you have.

How it works

The FDIC has two ways to take over a troubled bank: It can merge the bad bank into a healthy bank or liquidate the bank entirely. The merger — actually a purchase and assumption — is the preferred method. Your accounts simply get shifted into the new bank. All direct deposits, including Social Security payments, will automatically be redirected to the deposit accounts at the acquiring bank.

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Sometimes, however, the failed bank is in such serious trouble that the FDIC must liquidate it. In this case, the FDIC will pay you directly by check up to the insured balance in each account. Such payments usually begin within a few days after the bank closing.

If you have more money in the bank than FDIC insurance covers, you’ll have to get in line with the bank’s other creditors to get the rest of your money. You may wind up losing all of your uninsured deposits.

Unlike with a purchase and assumption, however, any uncleared checks you’ve written will be returned, and any automatic deposits or payments may also need to be rerouted to a new bank. And, of course, you’ll need a new account to reroute those checks and deposits to.

Can the FDIC go bust? The FDIC is backed by payments made by member banks. The FDIC’s Deposit Insurance Fund (DIF) totaled $121.9 billion as of Sept. 30, 2021, which is a bit more than 1 percent of the assets it insures. When the banking system is stressed and bank failures spike, the FDIC can — and has — authorized special extra levies on banks to shore up the DIF. So far, no insured depositor has lost a dime since the FDIC’s creation.