FDIC Insurance: What it is and what types of accounts it covers
J.P. Morgan Wealth Management
- The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that insures depositors at FDIC-member banks for up to $250,000 for certain account types.
- The FDIC is designed to protect account holders in the event of a bank failure.
- The account categories eligible for FDIC protection include checking accounts, savings accounts, money market accounts and certificates of deposit (CDs).
- FDIC insurance does not cover assets such as stocks, bonds, mutual funds, annuities or life insurance policies, regardless of the account they are in.
What is FDIC insurance?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that provides deposit insurance for account holders at its member banks in the event of a bank failure. The FDIC was created in response to the Great Depression, where roughly 9,000 banks failed and wiped out $7 billion in value, destroying the economy and the financial well–being of millions of Americans.
How the FDIC works
The FDIC operates by charging its member institutions premiums that fund the agency’s deposit insurance coverage, allowing it to cover account holders across the United States. The premium a bank pays is relative to its capital levels and supervisory ratings. In essence, banks that take on more risk pay higher premiums. Today, the FDIC insures deposits at nearly 5,000 FDIC-member banks and savings associations in the United States.
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FDIC insurance automatically covers deposits up to $250,000 per depositor, per institution, for each account ownership category. These categories include checking accounts, savings accounts, money market accounts and certificates of deposit (CDs). These account categories can be held by themselves or within other account types.
Only these account categories, which hold specific types of assets, are insured. For example, should a 401(k)’s allocation be 50% in stocks and 50% in a money market account, only the portion in the money market account would be insured. Additionally, individuals with more than one account at one member institution are insured for each of the individual eligible account categories they hold. So, if a customer has a savings account, a checking account and a money market account at one bank, they are each individually insured up to $250,000.
Holding multiple accounts of the same type does not change the insurance limit for the category. This means that even if you hold multiple savings accounts whose collective sum is greater than $250,000, your funds are only insured up to $250,000 limit for that specific category.
Additional types of accounts that may hold FDIC-eligible assets:
- Individual retirement accounts
- Self-directed defined contributions plans such as 401(k)s
- Self-directed Keogh plan accounts
- Section 457 deferred compensation plan accounts
- Joint accounts
- Revocable trusts
- Irrevocable trusts
- Employee benefit plan account
Asset types not covered by FDIC insurance:
- Stocks
- Bonds
- Mutual funds
- Crypto assets
- Life insurance policies
- Annuities
- Municipal securities
- Safe deposit boxes and their contents
- U.S. Treasury bills, bonds or notes (these are backed by the full faith and credit of the U.S. government)
Does the FDIC cover theft?
FDIC insurance is specifically designed to protect depositors against the loss of insured deposits if an FDIC-insured bank fails. It does not cover losses due to fraud or theft within individual accounts. This means that if your funds are stolen through means such as identity theft, phishing scams or embezzlement, FDIC insurance does not provide compensation for these stolen funds. Account holders are encouraged to promptly report any suspected fraudulent activity to their bank and law enforcement authorities to address such issues directly.
What happens when a bank fails?
In the event of a bank failure, the FDIC aims to protect insured depositors and help them regain access to their insured funds promptly. The process and timing for accessing these funds varies based on how the FDIC resolves the bank’s failure. Here are a couple ways the FDIC typically handles a bank failure:
- Acquisition by another bank: Often, the FDIC facilitates the acquisition of the failed bank by another financial institution. In these cases, you may have access to your insured funds almost immediately as the acquiring bank assumes control of the failed bank’s accounts.
- Direct payouts: If an acquiring bank is not immediately available, the FDIC may opt to directly reimburse depositors up to the insured limit. This could involve issuing checks or setting up new accounts at other insured banks on behalf of the depositors. While this process is generally swift, it may take several days or more from the time the bank is closed to when you can access your funds.
For amounts above the standard $250,000 FDIC insurance limit, the FDIC may attempt to sell the failed bank’s assets and use the proceeds to pay back portions of the uninsured funds. There is, however, no guarantee that any of the uninsured funds will be recovered.
Are all banks FDIC insured?
Not every bank is FDIC insured. To confirm your bank’s FDIC status, consider speaking with a bank representative. Customers can also visit the FDIC’s BankFind Suite to access detailed information about FDIC-insured financial institutions, including their current insurance status and FDIC membership history.
FDIC insurance vs. SIPC insurance
Unlike FDIC insurance, which covers predominantly cash accounts, the Securities Investor Protection Corporation (SIPC) provides investors coverage of their securities should a brokerage firm fail. In the event that a brokerage firm fails, account holders are insured up to $500,000 for any securities or cash held within the account, $250,000 of which can be used for cash similarly to FDIC insurance.
This type of insurance covers stocks, bonds, mutual funds and whatever cash was held in the account. SIPC does not cover investments unless the failed firm is an SIPC member and it does not protect against the loss of a security’s market value.
How to file an FDIC claim
To file an FDIC claim, many customers start by visiting the official FDIC website. For more personalized assistance, you may also be able to contact the FDIC through a dedicated hotline. FDIC support staff may be able to guide you through the necessary steps and provide more specific advice for your situation.
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