What Does FDIC Stand For and What Does It Cover

If you've read about bank failures in the news, you may be wondering what exactly FDIC insurance is and if you are sufficiently covered should your bank go belly up. Will your accounts be safe? What can you do to protect yourself from a possible bank run or financial crisis?

What Is the FDIC?
The FDIC (Federal Deposit Insurance Corporation) is essentially an insurance company that protects the money you deposit in an FDIC-insured bank. It is funded by banks; financial institutions pay insurance premiums for their coverage, much like you pay premiums for your homeowner's insurance.

A Quick Review of FDIC History
After the collapse of the United States banking system during the Great Depression, the FDIC was established in 1933. The United States government created the FDIC under the Glass-Steagall Act to prevent future runs on banks. The FDIC has been tested twice-in the 1980s and the 1990s-and has served its purpose well thus far. In 2008, the FDIC came through when IndyMac went under, proving its usefulness in current times.

What Does FDIC Insurance Cover?
The FDIC covers dollar for dollar up to $250,000 per depositor on deposit accounts. Not all accounts are covered by FDIC insurance, however, so just because your assets are in an FDIC insurance-backed bank does not protect you if your accounts are not deposit accounts. Take a look at your assets to get an idea of how well you're protected:

Types of Accounts Covered by FDIC Insurance

  • Checking accounts
  • Savings accounts
  • Money market accounts
  • Money market deposit accounts
  • Certificates of deposit (CDs)
  • Negotiable Order of Withdrawal (NOW) accounts
  • Cashier's checks (those that are outstanding from a financial institution)
  • IRAs

Types of Accounts Not Covered by FDIC Insurance

  • Stock accounts
  • Bonds
  • Mutual funds
  • Annuities
  • US Treasury securities
  • Life insurance policies
  • Contents of safe deposit boxes

What Happens If You Have More Than $250,000 in a Bank That Goes Under?
Let's say you have $275,000 in a deposit account in your local bank, and the bank goes under. How much will you be compensated? You'll automatically get $250,000 from the FDIC (or the bank account will be assumed by another bank, and the money will be moved by the FDIC), but what about the remaining $25,000? That remaining $25,000 is uninsured, so you may or may not recover that money. Much of how much you recover will depend on how much money is left over after the assets of your bank have been sold. Also, IRAs and Keogh accounts are insured by the FDIC dollar for dollar up to $250,000.

What Should You Do If You Have More than $250,000 in a Single Bank?

Diversify Your Accounts
The safest thing to do is to open accounts in separate, FDIC-insured banks. Each bank will insure you for up to $250,000, so you'll need to spread your wealth over the number of banks necessary to make sure you are fully insured on each deposit account. If you have $500,000 in deposit accounts in one bank, you'll want to open two accounts, each for $250,000, at two different banks.

Name a Second Beneficiary
A second option is to name a second beneficiary on some of your accounts. Let's say you have $500,000 in your local bank. Each depositor is entitled to $250,000 worth of insurance, so if you name another person as the beneficiary on one account for $250,000 and leave yourself as the beneficiary of the first account for $250,000, you can cover both accounts.

Divide Ownership
A third option is to name a business as a beneficiary on an account. If you have $500,000 in your local bank and you own a business called Me, Myself and I Incorporated, you can open one account for $250,000 in your name and one account for $250,000 as belonging to Me, Myself and I Incorporated. All $500,000 will still be insured.

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