This blog post is a simple guide to understanding bank insurance. In short, FDIC bank insurance is a government-backed program that protects funds in case of bank failure. As you will learn, not all banks are FDIC insured. At Terrabank, we have been FDIC insured since 1985!
FDIC stands for the Federal Deposit Insurance Corporation. It is an independent agency of the United States government that was created in 1933 in response to bank failures during the Great Depression. The sole purpose of the FDIC is to promote stability and public confidence in the nation's financial system by insuring deposits and regulating financial institutions. In addition to deposit insurance, the FDIC examines financial institutions to ensure their safety. It protects depositors and the banking system in case of bank failures and plays a role in resolving failed banks and liquidating their assets.
While a bank failure is rare, reasons it could occur are undercapitalization, liquidity, lack of safety and soundness or fraud. It is the FDIC’s job to resolve the failure as both the insurer of the bank’s deposits and as the receiver of the failed bank. As the insurer, the FDIC can either provide depositors with new accounts at the bank or issue a check with the insured balance of their account. As the receiver, the FDIC inherits the tasks of dealing with the assets of the failed bank and assessing its debts. If certain depositors have funds above the insured limit of $250,000, they can recover portions of their uninsured funds from the sale of the failed bank’s assets.
There is no individual process for getting deposit insurance. Depositors are automatically insured when opening a deposit account at an FDIC-insured bank. At Terrabank, we are FDIC insured. The standard deposit insurance amount is $250,000 per individual, bank and ownership category.
Not every financial product at your FDIC-insured bank is covered. This deposit insurance only covers checking and savings accounts, money market deposit accounts and certificates of deposits.
Investments such as mutual funds, annuities, life insurance policies and stocks and bonds are not covered by the FDIC. For each form of investment, there are unique risks and regulations. Investments such as mutual funds and stocks usually do not fit within the $250,000 insurance limit, adding to why they are not covered. The FDIC’s job is to supervise financial institutions and instill protection, not to safeguard investments made in other types of financial capacities.
There are many ownership categories that can be protected by the FDIC, not just individual accounts. These include certain retirement, joint, revocable trust, irrevocable trust, employee benefit plan, corporation/partnership, unincorporated association and government accounts. The rights that follow these accounts are ownership, control and prompt payment. This means that ownership remains with the account holder or entities, and prompt payment will follow if a bank were to fail. In any event, the FDIC does not take ownership of any funds.
If you enjoyed this blog post or are looking to manage your finances effectively, please visit www.terrabank.com to explore more blog posts and learn about Terrabank’s bank products and programs.
The material provided on this website is for informational use only and is not intended for financial, tax, or investment advice. Terrabank and/or its affiliates, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.