The FDIC stands for the Federal Deposit Insurance Corporation. The FDIC operates as an independent entity in the federal government of the U.S. The FDIC protects people if their deposits made with insured banks are lost for some reason, such as the bank failing.
The Creation of the FDIC
The FDIC was created in 1933 in the midst of thousands of failing banks throughout the 1920s and early 1930s. Banks were closing in high numbers because of the Great Depression. The FDIC agency was created under the Banking Act of 1933, which was signed into law by President Franklin Roosevelt.
Before the creation of the FDIC, if a bank closed, the money held in deposits there was lost. The FDIC was created not only to protect consumers but also to restore a sense of public confidence in banking institutions, which had been lost during the ‘20s and ‘30s. The official start date that the FDIC became effective was January 1, 1934. Since that inception date, no one with covered deposits has lost any money from insured funds if banks have failed.
The FDIC agency is funded by premiums paid by banks and institutions. These premiums are paid in exchange for deposit insurance coverage. Sometimes people don’t realize that the FDIC is only in place to insure deposits. This means that investments such as securities or mutual funds aren’t insured.
What is FDIC Insurance?
So, what specifically is FDIC insurance, and how do you know if you have it? FDIC insurance covers the deposits that you make at a bank or financial institution that’s insured by the FDIC. You don’t have to opt in or do anything in particular for coverage. There is a limit of coverage—it’s up to $250,000. However, there’s more to it than that.
Depending on the type of accounts you have, you may have coverage for all of them held at the same financial institution. To maximize the amount of FDIC protection you have on your deposits, you want to ensure that you’re not exceeding that $250,000 FDIC insurance maximum in any particular category.
The categories include single accounts, joint accounts, certain retirement accounts, revocable and irrevocable trust accounts, and employee benefit accounts, among others. One of the things that most people don’t realize when looking at these categories is that single accounts held by one person and joint accounts held by two or more people are designated into separate categories.
To provide an example—if you have a single account with $25,000 that’s in your name, and then you have a joint account with your spouse with $250,000, both are insured to the maximum because they are from separate categories.
Even if you have a joint account with someone, such as your spouse, and it has more than $250,000, it may be insured for more than the limit because each account owner has a separate FDIC insurance maximum of $250,000.
Accounts Insured by the FDIC
The specific types of accounts that are insured by the FDIC include:
- Savings accounts
- Checking accounts
- Money market accounts
- Certificates of deposit (CDs)
- Money orders
- Cashier’s checks
Accounts not insured by the FDIC include:
- Mutual funds
- Treasury securities
- Municipal securities
- What’s contained in safe deposit boxes
- Life insurance policies
Most banks are FDIC members, but before opening a new account, you should verify that is will be insured. If you make deposits with a credit union, they’re insured by the National Credit Union Share Insurance Fund. While there are criticisms of FDIC, it’s still very much a needed protection. Banks can and do fail all the time even now, and hundreds of banks failed during the subprime mortgage crisis starting in 2008. Having the coverage and peace of mind provided by FDIC insurance is essential.