How The FDIC Guarantees Your Money
Think back to the last time you visited your local bank branch. As you entered the building, you may have noticed a small decal on the door that said “FDIC.” That stands for Federal Deposit Insurance Corporation, an institution that most people know very little about.
Most of us have grown up to believe that financial institutions don’t fail. However, as the past 12 months have illustrated, they can and do fail occasionally. The question is, what happens to your money in the event of a banking failure? The Federal Deposit Insurance Corporation insures it.
Below, we’ll explain how the coverage works, what it applies to, and how you can ensure that all of your assets are covered.
Understanding Where The Coverage Applies
It’s important to note that FDIC coverage does not apply to every type of product offered by your bank. Nor is it without limits. Your savings and checking accounts are covered as are your certificates of deposit and money market accounts. However, your money market funds are not covered by the Federal Deposit Insurance Corporation. Nor are your annuities, stocks, or mutual funds. If you have items in a safe deposit box, those items are also not covered.
Before 2008, the insurance covered each depositor’s assets up to $100,000. However, that limit was temporarily raised to $250,000 in 2008 in order to allay concerns stemming from the mortgage industry. The limit is scheduled to return to $100,000 on January 1, 2010.
What Happens When A Bank Fails?
The most secure place to keep your money is in a bank that is FDIC-insured. Having said that, banking institutions can fail for a number of reasons, including excess exposure to high-risk investments. When this happens, the FDIC steps in. They will either find another financial institution to buy the accounts or they will manage the accounts themselves.
In the past, whenever a banking institution has failed, the transition of depositors’ assets has been seamless. In fact, many customers would never know about the event if they didn’t hear about it on television or read about it in the newspaper.
How To Maximize Your Coverage
Suppose you have $600,000 in assets at your bank. Keep in mind that the FDIC will only cover up to $250,000 at each institution. To eliminate your risk of loss, you should split your money between three different banks. Cumulatively, that would provide you with more than enough coverage ($750,000).
If you are one of multiple owners of a jointly held account, the Federal Deposit Insurance Corporation will cover up to $250,000 for each owner. For example, if you share a joint checking account with a spouse and it contains $400,000, there is no need to split the assets between two banks. The entire $400,000 would be covered.
The purpose of the FDIC is twofold. First, it guarantees that depositors will not lose their money in the event of a banking failure. Second, it injects valuable confidence into the banking industry. As long as your assets are with an FDIC-insured institution, they are out of harm’s way.
