What does it mean to be insured by the FDIC?
The stock market crash of 1929 and the Great Depression that followed created financial chaos in the United States. During this time, many banks went bankrupt, and without any guarantee that their money would be safe, there were numerous bank failures across the country. As a result, the government has put in place safeguards to avoid such dire scenarios in the future.
One of those protections was the creation of the Federal Deposit Insurance Corporation (FDIC), an independent federal agency that guarantees consumer deposits in the event of bank failure. This guarantee gave banking customers peace of mind, thus ensuring the stability of the banking sector.
What is FDIC insurance?
FDIC insurance guarantees the funds deposited in the event of bank failure. Currently, the FDIC insures up to $ 250,000 per depositor, per category of property. This means that even if your bank becomes insolvent and can no longer disburse the money you deposited, the FDIC will still guarantee those deposits up to the limit.
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When people know their money is safe and will be there when they need it, they usually don’t run to the bank to frantically withdraw it. Or, as Ben McLaughlin, president of SaveBetter.com In other words, knowing that our money is safe allows us to focus on other things that matter to us, like the bank’s mission or its location.
FDIC Insurance Requirements
To be insured by the FDIC, your account must be held at an FDIC member bank. These member banks must display their membership prominently at the counters. You may have also heard radio commercials for financial institutions that say “member, FDIC” at the end.
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In addition, only certain types of accounts are covered by FDIC insurance. Your account must be one of these types to be FDIC protected. These types of accounts include checks, savings accounts, money market accounts, and certificates of deposit (CDs).
There is also a long process when banks want to become members of the FDIC. This was explained by Philippa Girling, Risk Manager at Bank Varo. Banks must meet with the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, and the FDIC. The process takes about three years.
Multiple accounts and joint accounts
Remember that the FDIC covers up to $ 250,000 per depositor, per category of property. This means that if a single person has multiple accounts at the same bank, the total amount of all their accounts is covered up to $ 250,000. So if they have a checking account, savings account, and money market account with a total value of $ 350,000, that person will have $ 100,000 which is not FDIC insured.
But there is a simple solution to this problem. These limits only apply to each bank, which means that if our person transfers $ 100,000 to another FDIC member bank, the entire $ 350,000 will now be covered. With joint accounts, each owner is insured for the full amount. For example, if a married couple has a joint savings or checking account, they are insured up to $ 500,000 in their joint account (s).
Or we can go further. With a combination of individual and joint accounts, you can have up to $ 1 million insured in a bank for a household, says Gary Zimmerman, managing partner at Capital of six trees. “Example: Alex might have an Individual Account with $ 250,000 coverage, Sam might have an Individual Account with $ 250,000 coverage, and Alex and Sam might have a Joint Account with $ 250,000 coverage. $ 500,000 because a joint account is different. Category of property for which Alex and Sam would each be entitled to $ 250,000 in coverage in addition to the coverage they are entitled to on their individual accounts.) “
Why do i need FDIC insurance?
While you might think that your bank will never go bankrupt, it does happen, albeit on rare occasions these days. There were four bank failures in 2020; in 2010, there were 157. The likelihood of a particular bank going bankrupt is relatively low, but there is no charge for keeping your money with an FDIC member. So, it is a wise decision to keep your money in a safe place if your bank becomes a rare failure in the history of our country.
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“Read the fine print,” says Gabe Krajicek, CEO of Kasasa. “If the fintech payment service provider you are using does not have FDIC insurance, be careful: use an FDIC insured account to fund your payment account, only store enough money to meet your needs. specifics and reduce your balance when you don’t. need that. While it may seem unlikely that a business will go out of business, it does happen, and if it does, your funds will not receive favorable protection. “
This article is part of GOBankingRates’ “ Economy Explained ” series to help readers navigate the complexities of our financial system.
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Last updated: May 25, 2021