If you’ve opened up just about any kind of bank or investment account, you’ve probably run into the words “FDIC Insured”. They’re posted in lobbies of local banks and at the desks of financial advisors. Most likely they make you feel a sense of security. After all, it’s good to know that the place you’re trusting with your money is insured by someone.
But what does it really mean for a bank or firm to be FDIC insured? How can you make sure that you are taking full advantage of the FDIC insurance offered to you as an investor?
Who is the FDIC?
The FDIC, or Federal Deposit Insurance Corporation, is a US government entity that provides deposit insurance to customers of US banks. The FDIC was created in 1933 with the passing of the 1933 Banking Act to shore up trust in the American Banking system during the Great Depression.
In the few years prior to the creation of the FDIC, bank runs were common.[i] This is not surprising as during the depression, more than a third of banks in the US failed. Initially, the FDIC insurance limit was $2,500 per ownership category. With the passage of the 2011 Dodd-Frank Wall Street Reform and Consumer Protection Act, the FDIC insurance limit is now $250,000.[ii]
FDIC Insurance in a nutshell:
When a bank or firm is FDIC insured it means that the FDIC all of its deposit accounts. Deposit accounts include checking, savings, and money market accounts as well as certificates of deposits. The accounts are insured up to $250,000 per depositor, per insured bank, for each account ownership category.[iii]
What does that mean for me?
At first glance it may seem that FDIC insurance will only cover $250,000 total per investor. This isn’t necessarily true, however. Remember that FDIC insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category.
So what does the FDIC mean when they say “for each ownership category”? Basically, the FDIC considers single name accounts, single POD or TOD accounts (Pay on Death or Transfer on Death), IRA accounts, joint accounts, and trust accounts as separate ownership categories.
The chance of banks failing is remote, but as we saw during the financial meltdown, things we thought wouldn’t happen, happened. So if your bank were to go under, the FDIC would look at your single name accounts and reimburse you for up to $250,000 of the total of those accounts. Then they would look at your IRA accounts and reimburse you for up to $250,000 of the total of those accounts. They’d do the same with your single POD accounts, joint accounts, and trust accounts. [iv]
By having accounts in different ownership categories your FDIC insurance can cover much, much more than $250,000.
What isn’t covered by the FDIC?
Anything that isn’t considered a deposit is not covered by FDIC insurance. This includes stocks, bonds, annuities, life insurance policies, and securities, even if these investments are made at banks.[v]
How might this affect my investment strategy?
Be careful about going above FDIC insurance limits at each financial institution. To make sure you don’t, look at the deposit accounts you have at each place and make sure they are under $250,000 per ownership category. If you are maxed out at one financial institution consider moving the funds to another. Bottom line, if you’re offered free insurance you should make use of it!
[i] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2185582
[ii]http://archive.boston.com/business/personalfinance/managingyourmoney/archives/2010/09/fdic_insurance_3.html
[iii] https://www.fdic.gov/deposit/deposits/
[iv] http://www.cbsnews.com/news/maximizing-your-fdic-insurance/
[v] https://www.fdic.gov/deposit/deposits/
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