What is bank insurance?
Bank insurance is a guarantee by the Federal Deposit Insurance Corporation (FDIC) of deposits in a bank. Established in 1989, the Bank Insurance Fund is the federal fund used to insure the bank deposits of national and state banks that are members of the Federal Reserve System. Bank insurance helps protect people who deposit their savings in banks against the insolvency of commercial banks. Each depositor is insured for at least $ 250,000 per bank.
Understanding Bank Insurance
The FDIC, an independent US government corporation, was established under the Glass-Steagall Act of 1933. Its purpose was to insure bank deposits against loss and to regulate banking practices. The collapse of a large majority of banks in the United States during the Great Depression prompted the creation of the FDIC.
FDIC deposit insurance coverage depends on two things: whether the financial product you choose is a deposit product and whether your bank is FDIC insured. If your insured bank goes bankrupt, FDIC insurance will cover your deposit accounts dollar for dollar up to the insurance limit, including principal and accrued interest up to the date the insured bank closes.
FDIC coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution. If you want FDIC deposit insurance coverage, all you need to do is put your funds in a bank deposit product.
Typically, a bank goes bankrupt if it is unable to meet its obligations to depositors and others. If a bank goes bankrupt, the FDIC responds in two ways. First, as the bank’s deposit insurer, the FDIC pays insurance to depositors up to the insurance limit. Second, the FDIC, as the “receiver” of the failing bank, takes on the task of selling / collecting the assets of the failing bank and settling its debts, including claims for deposits in excess of the insured limit.
FDIC bank insurance coverage includes
- Check accounts
- Negotiable Withdrawal Order Accounts (NOW)
- Savings accounts
- Money Market Deposit Accounts (MMDAs)
- Term deposits such as certificates of deposit (CDs)
- Cashier’s checks, money orders and other official instruments issued by a bank
FDIC bank insurance coverage does not include
- Equity investments
- Bond investments
- Mutual fund
- Life insurance policies
- Municipal titles
- Safes or their contents
- US Treasury bills, bonds or notes
Example of how FDIC bank insurance limits work
FDIC insurance limits are one of the most misunderstood forms of financial security in the United States, even among bank staff. the short answer is always “FDIC insurance is limited to $ 250,000 per person, but that is not correct.
Each person can avail of $ 250,000 of insurance per bank category, as stated by the FDIC. These categories include individual accounts, joint accounts, assets held on behalf of others as payment to death accounts, certain types of retirement savings accounts, and several others. A single person, with assets spread across multiple qualified accounts, could theoretically have $ 500,000, $ 750,000 or even $ 1 million insured in bank deposits.