What is FDIC insurance?

When you deposit money into a bank account, you expect that money to stay there until you withdraw it. But how can you be sure your money will be safe if the bank runs into trouble? That’s where FDIC insurance comes in.

“FDIC insurance ensures the safety of depositor funds up to a certain amount and promotes stability in the United States banking system,” explains Jason Koontz, an independent consultant with decades of banking experience.

FDIC-insured accounts are protected up to $250,000 per depositor, per account ownership category, in the unlikely event of a bank failure. Or, in other words, each person who puts money into an account is insured for each type of account they have, which protects them if the bank goes out of business. Let’s dive into more questions and learn what FDIC insurance is.

First, let’s start with what FDIC stands for: Federal Deposit Insurance Corporation. FDIC insurance is managed by an independent government agency and is a program designed to protect deposits against the possibility of bank failures.

Banks can apply for FDIC deposit insurance and, if they are approved, they pay premiums to the FDIC for coverage. FDIC protection is backed by the full faith and credit of the U.S. government and helps assure that even if a bank fails, people who have deposited money there won’t lose all their funds.

The first deposit insurance programs in the United States started at the state level. Beginning with New York in 1829 until 1917, 14 states created plans to protect bank deposits and similar accounts. These programs were made to protect customers from bank failures and ensure the financial stability of communities.

These programs didn’t completely work, though. By 1933, thousands of banks had closed, and the entire U.S. financial system was struggling. Because past efforts to create some sort of federal deposit insurance program hadn’t worked, bank customers were left unprotected. Depositors lost $1.3 billion because of the thousands of bank failures coming from the financial crash that led to the Great Depression, according to the Pew Research Center. 

In response, Congress passed the Banking Act of 1933, and President Franklin D. Roosevelt signed it into law. The act officially created the FDIC to build confidence again in the banking system and prevent further financial issues. Since then, “no depositor has lost a penny of insured funds as a result of a failure,” according to the FDIC.

While the FDIC insures banks, individuals benefit too.

“FDIC insurance benefits U.S. banking customers by providing peace of mind and confidence that their deposits are protected up to $250,000 per depositor, [per account category], per insured bank,” Koontz says. “In the event of a bank failure, the FDIC steps in to ensure depositors’ funds are reimbursed promptly, maintaining stability and helping to prevent panic in the banking system.”

This protection applies to the accounts of individuals, families and businesses. It helps build trust in the U.S. banking system and encourages people to use banks with confidence, according to Koontz.

Customers don’t need to apply for FDIC insurance. They simply need to make sure their bank is FDIC-insured.

You can usually find out if a bank is FDIC insured by checking its website. Or you can search the FDIC database to find certified institutions in your area. 

So, what does the FDIC do when an insured bank fails? Koontz explains that after a bank failure, the FDIC will take over as the caretaker and manage the bank to keep things running as smoothly as possible.

“While this can happen on any day of the week, the FDIC often takes over a troubled bank on a Friday near the close of business,” Koontz says. He notes that the FDIC will have been doing plenty of work behind the scenes leading up to this. “A Friday takeover allows the FDIC the weekend to work on the failed bank,” he continues. “The FDIC has several options for resolving a failed bank. These include selling its assets and deposits to another institution, arranging a merger with a healthier bank or creating a bridge bank to maintain banking operations until a suitable buyer is found.”

As mentioned above, the FDIC also protects the failed bank’s customers if needed. This protection covers up to $250,000 per depositor, per insured bank, for each account ownership category. These could be individual accounts, joint accounts, retirement accounts or trust accounts, for example.

It’s also important to note that bank failures are very rare. Most of the time, banks are able to remain financially stable. And if they’re FDIC insured, the agency will examine and monitor them to make sure they follow consumer protection laws.

If a bank fails, customers may be at risk of losing funds that aren’t protected by FDIC insurance. Funds may not be covered if:

• They’re held at a non-FDIC-insured institution. 

• They’re held in accounts that aren’t eligible for FDIC protection. 

• They’re over the $250,000 coverage limit.

In the rare times that an insured bank fails, the impact on customers will depend on the steps the FDIC takes in response.

“If a bank is acquired by another institution, customers’ accounts and services generally continue without interruption, and they become customers of the acquiring bank,” Koontz explains.

In the case of a bridge bank—a temporary bank the FDIC sets up to keep things running while it finds a long-term solution—customers can usually access their accounts and continue using their bank accounts without major disruption. “However, in some cases there may be temporary limitations on certain transactions or services until the resolution process is complete,” Koontz says.

The usual FDIC deposit insurance amount is up to $250,000 per depositor, per bank, for each account ownership category. That maximum applies to all the banks you have an account with, as long as the bank is an FDIC member. (Capital One is an FDIC member.)

You can use the FDIC’s Electronic Deposit Insurance Estimator, or EDIE, to determine your total coverage across all your accounts and banks.

Koontz says it’s possible the FDIC may try to pay back funds beyond the $250,000 guarantee. But for now, you shouldn’t expect funds above that amount to be protected. There are steps you can take, however, to make the most of your FDIC protection.

If you’re looking to deposit more than $250,000, the FDIC insurance limits may be a concern. This is the same for individuals, families and businesses. Fortunately, there are some ways you can increase the protection you receive.

One option is to open multiple accounts with different ownership categories at the same bank. “The FDIC provides separate coverage for different ownership categories, such as individual accounts, joint accounts, retirement accounts and certain trust accounts,” Koontz explains. “By utilizing these categories effectively, you can increase your overall coverage.” 

Another way is to open accounts at different banks, Koontz says. While it could be a little more difficult to manage accounts at different banks, he notes that it’s often a wise decision.

“By distributing your deposits among different insured banks, you can ensure that each account remains within the coverage limit,” Koontz explains.

It’s also possible to increase your coverage by opening what’s known as a revocable trust account and assigning multiple beneficiaries. A revocable trust is an account that pays out to beneficiaries upon the death of the account holder. Think about meeting with a tax advisor to discuss your specific situation.

Under FDIC rules that took effect on April 1, 2024, the FDIC insures trust accounts up to $250,000 per eligible beneficiary, with a maximum of $1,250,000 in coverage per owner for five or more beneficiaries. That means a trust with one owner and five beneficiaries could receive up to $1,250,000 in FDIC coverage. A joint trust with two owners and five beneficiaries could receive up to $2,500,000 in coverage.

FDIC rules have changed multiple times since the program started nearly a century ago. Koontz says that you should keep up with any changes to be sure your deposits remain protected.

“It’s important to stay updated on any changes to FDIC coverage limits or regulations,” Koontz says. “From time to time, review your deposit accounts and assess whether any adjustments are needed.” Again, that could include opening several different account types within the same FDIC-insured institution. It could also mean spreading your accounts across multiple FDIC-insured banks.

Koontz’s insights, from what the FDIC does to how the FDIC can help you as a bank customer, should make you feel more confident about opening an FDIC-insured bank account. That could include one or more of the following:

• Online savings account

• Checking account

• Certificate of deposit (CD)

• Money market account

• Individual retirement account (IRA) savings account

• IRA CD

While FDIC rules apply to every insured account, everyone’s financial situation will differ. “It’s always important to talk to your banker, financial advisor or even the FDIC directly for more personal guidance,” explains Koontz.

Here are some key takeaways from our guide, “What is FDIC insurance?” and what it means for your money:

• FDIC insurance protects eligible bank deposits up to the standard coverage limits if an FDIC-insured bank fails. 

• Coverage applies automatically to eligible accounts at FDIC-insured banks, so you don’t need to sign up or pay for protection. 

• Understanding your coverage limits can help you keep your money protected and make informed banking decisions.