What is FDIC Insurance? How it Works and Insurance Limits

In the rare case that a bank fails, FDIC insurance helps safeguard the money you put into your deposit accounts.

When it comes to saving, the last thing you want to worry about is your money not being protected. It's one reason to stop stuffing bills under the mattress and tuck away those hard-earned bucks into a bank account to keep them safe.

But what happens to your life savings if a bank fails? If the worst happens, your money is protected if the bank is a member of the Federal Deposit Insurance Corporation (FDIC)—a deposit insurance agency that's backed by the federal government. It guarantees that deposit account balances held at member financial institutions—think banks or savings associations—are covered for up to a certain amount. This provides a welcome measure of added protection.

But what is FDIC? What is the FDIC insurance limit? Get the scoop on how the FDIC works, FDIC insurance limits, the types of FDIC-insured accounts, and how to get your money back if a bank falters.

What Is FDIC? Why Was FDIC Created?

FDIC stands for Federal Deposit Insurance Corporation. The FDIC is an independent agency of the U.S. government that insures deposit accounts in U.S. banks and thrifts. The FDIC's purpose is to protect consumers' deposits in member financial institutions—so if a member bank fails, you can get your money back up to an eligible amount.

The FDIC was created in 1933 in response to the scores of bank failures that occurred in the 1920 and early 1930s during the Great Depression. It wiped out many people's savings, triggering a national crisis. Scary, right?

Here's the good news: Since the inception of FDIC insurance in 1934, not a single cent of insured funds has been lost by an account holder at an insured financial institution due to a bank failure.

However, banks aren't automatically insured by FDIC. They must apply to become members and pay regular premiums to the agency. So this is why you should always check that a financial institution is FDIC-insured before stashing your cash in a deposit account.

What Is FDIC Insurance?

An FDIC-insured account is a bank account whereby deposits are federally insured against bank failure or theft. FDIC insurance covers all types of deposit accounts up to $250,000, per account holder, ownership category, per FDIC-insured bank. Deposit products such as savings, checking, and money market accounts are covered, while investment products like mutual funds are not. So basically, it protects your money! 

Coverage is automatic when you open a deposit account at a member financial institution. So, if your financial institution is FDIC-insured, there are no extra steps to sign up for and benefit from this insurance.

What about money in deposit accounts at a credit union? Credit unions are regulated under a different entity: the National Credit Union Administration (NCUA). Like the FDIC, the NCUA is an independent federal agency. So funds put into deposit accounts in a federally-backed credit union are insured by the National Credit Union Share Insurance Fund, which is administered by NCUA.

How FDIC Insurance Works

FDIC's deposit insurance fund is funded by two main sources: premiums from banks and savings associations, and interest earned from investments in U.S. Treasury securities. However, the FDIC is the organization that insures the funds in your deposit account and pays account holders if a bank fails.

Here's an example of how FDIC insurance works: Let's say you have $20,000 in a savings account with a local bank. In the rare case that the bank shutters, one of two things could happen: your account and funds will be transferred to another member bank that's financially healthy, or the FDIC will issue you a check for the $20,000 you deposited.

FDIC Insurance Limit: How Much Does it Cover?

The FDIC insurance limits are as follows: FDIC insurance covers deposit accounts of up to $250,000. This includes principal and interest, and the coverage is dollar-for-dollar. The $250,000 cap is for each account holder, at each bank, and for each ownership category.

Example Scenarios

It largely depends on where you parked your money and the balance. Here are some example scenarios:

• Scenario 1: One account with under $250,000. Let's say you have a certificate of deposit (CD) with a principal balance of $195,000 and $5,000 in accrued interest. If your bank is FDIC-insured, the full $200,000 would be protected.
•  Scenario 2: One account with more than $250,000. If you have $300,000 in a joint savings account, only $250,000 would be protected. The remaining $50,000 would be uninsured.
• Scenario 3: More than $250,000 in two bank accounts at two different institutions. If you have $250,000 in a deposit account at one bank, and $250,000 at a different bank, the full amount deposited in both banks would be covered (so $500,000 would be insured).
• Scenario 4: Under $250,000 across multiple deposit accounts at one institution. Within the ownership category of single accounts, if you have $125,000 in savings account with a bank, $50,000 in a CD, and $2,000 in a checking account, that adds up to $177,000. In turn, as that's less than $250,000 in total, all three accounts would be covered.
• Scenario 5: More than $250,000 across multiple deposit accounts at one institution. Let's say you have two accounts at the same FDIC-insured bank—$300,000 in a savings account and $50,000 in a CD. In that case, only up to $250,000 would be backed by the FDIC. The remaining $50,000 in your savings and $50,000 in your CD won't be protected.

Not sure if all the funds among your different accounts are insured? You can try the FDIC's Electronic Deposit Insurance Calculator (EDIE) to figure out exactly what accounts and amounts are protected.

FDIC Insurance: Which Accounts are Covered?

Covered

The types of deposit accounts that are covered by the FDIC include:

• Checking accounts
• Savings accounts
• High Yield Savings
• Money market deposit accounts
• Certificates of deposits
• Negotiable order of withdrawal (NOW) accounts
• Cashier's checks, money orders, and other official items issued by the bank
• Deposits held within self-directed retirement accounts (i.e., individual retirement accounts [IRAs], self-directed contribution plans like a 401[k])
• Deposit accounts held within revocable and irrevocable trusts
• Prepaid cards (if FDIC requirements are met)

Not Covered

Types of accounts that your bank might offer but aren't insured by the FDIC include:

• Annuities
• Mutual funds
• Stocks
• Bonds
• Government securities
• Municipal securities
• Safe deposit boxes and contents
• U.S. Treasury securities
• Life insurance policies

What Types of Ownership Categories Are FDIC-Insured?

As mentioned, the FDIC insurance limit is up to $250,000 per account holder, ownership category, per bank. Although the terms may sound similar, an ownership category is not to be confused with an account holder or owner. Here are the different ownership categories of deposit accounts that are typically backed by FDIC insurance:

• Single account. A deposit account owned by one person.
• Joint account. A deposit account owned by at least two people.
• Certain retirement accounts. Self-directed retirement accounts, or accounts where the plan participants can direct how the money is invested. These include IRAs, self-directed contribution plans (i.e., 401(k) or profit-sharing plan), self-directed Keogh plan accounts, and Section 457 deferred compensation plan accounts.
• Revocable trust accounts. A deposit account owned by one or more people that identify at least one beneficiary. Upon the death of the owner(s), the beneficiary will receive the deposits.
• Irrevocable trust accounts. A deposit account that's linked to an irrevocable trust that's established by a written trust agreement or a statute.
• Employee benefit plan account. A deposit of a defined benefit plan, pension plan, or employee benefit plan that isn't self-directed.
• Corporation, partnership, or unincorporated association account. Deposits that are owned by corporations, partnerships, and unincorporated associations.
• Government account. Deposit accounts owned by a U.S. federal agency; state, county, or municipality; or Indigenous/Indian tribe.

How to Check if Your Bank is FDIC-Insured

Currently, the FDIC insures 3,500 financial institutions, which make up half of the banks and savings associations in the U.S. If you are a deposit account holder with Synchrony Bank, your money is backed by the FDIC. You can also check out FDIC's nifty online tool, BankFind, to see if your bank is an FDIC-insured institution. 

FDIC Insurance: How to Get Your Money Back If a Bank Fails

Should a bank fail and close its doors, the FDIC responds right away. One of two things can happen: For the first, it may provide depositors with a new account at another insured bank. The amount in the new account will equal the balance in your shuttered bank account. As long as your funds fall within coverage limits, the amounts in your accounts will be the same. In this scenario, the FDIC might try to find a nearby bank where you can temporarily receive payment of your insured funds via direct deposit.

Or the FDIC will issue a check. If the payment is issued to you (the account holder), the FDIC is required to get a check in your hands as swiftly as possible—ideally, no longer than two business days after the bank shuts down.

However, the response depends on the situation, and there might need to be a review of your accounts before the money is sent your way. You don't need to file a claim to get your money back, nor do you need to sign up for insurance when you first open an account with your bank. 

What If Your Money Exceeds the FDIC Insurance Limits?

What happens if a bank fails and your deposit account balance exceeds the $250,000 FDIC insurance limit?

Great question. If there's any money that exceeds the cap, you'll receive a claim for that amount. If the failed bank liquidates its assets, you might receive some or all of that money back.

For instance, let's say you have a single deposit account with $275,000, but an FDIC-insured bank goes under. Of your balance, $250,000 is protected and you'll get that amount back through FDIC. For the uninsured $25,000 remainder, you'll get a Receiver's Certificate—which serves as proof of your claim. You might get some or all of that $25,000 after the bank liquidates its assets. 

As you can see, FDIC insurance is an essential feature in a financial institution and guarantees your money is safe. Plus, it can give you greater trust and faith in the U.S. financial system.

FDIC Insurance: FAQs

What is the FDIC insurance limit?

The FDIC insurance limit is up to $250,000 per depositor, per financial institution, per ownership category. Read more about Synchrony Bank's FDIC coverage here.

Are traditional savings accounts FDIC insured?

Traditional savings accounts are insured for up to $250,000 for single and joint deposits. If there is more that one depositor, the insurance is $250,000 per depositor.

Are CDs FDIC insured?

Yes, certificates of deposits are FDIC insured. All deposit accounts are insured and the amount of insurance is based on the ownership category. 

Are Money Market accounts FDIC insured?

Yes, money market deposit accounts are backed by the FDIC. All deposit accounts are insured and the amount of insurance is based on the ownership category. 

Bottom Line: Why Is FDIC Insurance Important?

FDIC insurance is important because it instills trust, stability, and confidence in U.S. financial system. When you deposit money into an FDIC-insured financial institution, such as Synchrony Bank, you can have confidence that the funds in deposit accounts have some degree of protection. 

In the unlikely case that an FDIC-insured bank fails and shuts down, you can be sure that you'll get your insured money back. It's important to work with a trusted bank that is backed by FDIC insurance. That way, you can breathe easy knowing that your money is protected.

Learn more about maximizing the return on your savings with FDIC-insured high-yield savings accounts.