Protecting Your Bank Deposits

(The Federal Deposit Insurance Corporation)

By Cynthia Rivera


When a customer deposits funds in an insured bank located in the United States, these deposits are generally protected by the Federal Deposit Insurance Corporation (FDIC) against loss in the event that the bank fails. The FDIC, an independent agency of the United States government, will cover the balance of each depositor’s account up to the insured limit of $250,000, including the principal and any accrued interest through the date of the insured bank’s closing.

The FDIC protects deposit accounts, including: checking accounts, savings accounts, money market deposit accounts, NOW (Negotiable Order of Withdrawal) accounts, and Certificates of Deposit (CDs).  However, money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities is not insured by the FDIC, even if these products were purchased from an insured bank. The FDIC standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

The FDIC’s $250,000 insurance amount applies to deposits per insured bank. This means that amounts in one bank are insured separately from any other deposit that the customer might own in a separate bank. For example, a customer who owns a checking account in Bank X, but also has a checking account at Bank Y, will receive coverage up to $250,000 for each account. Funds deposited in separate branches of the same insured bank, however, are not separately insured.

The FDIC standard insurance amount of $250,000 applies to deposits that a bank customer may have in different categories of ownership. These categories include:

  • Single Accounts (owned by one person with no beneficiaries): $250,000 per owner.
  • Joint Accounts (two or more persons with no beneficiaries): $250,000 per co-owner.
  • IRAs and other certain retirement accounts: $250,000 per owner.
  • Revocable trust accounts: Each owner is insured up to $250,000 for each unique eligible beneficiary named or identified in the revocable trust, subject to specific limitations and requirements.
  • Irrevocable Trust Account: $250,000 for the trust – more coverage available if requirements are met.
  • Employee Benefit Plan Account: $250,000 for the noncontingent interest of each plan participant.
  • Corporation, Partnership, or Unincorporated Association Account: $250,000 per corporation, partnership or unincorporated association.
  • Government Account: $250,000 per official custodian.

*These deposit insurance coverage limits refer to the total of all deposits that account owners have at each FDIC-insured bank.

Accounts within the same ownership category, owned by the same person and held at the same insured bank are totaled by the FDIC as a group when applying the $250,000 limit.   For example, if a customer owns several single accounts (a savings account with $20,000, checking account with $50,000 and a CD with $200,000) at one bank, the FDIC will add together all single accounts and insure the total up to $250,000. As a result, the customer will be left with $20,000 of the total deposits uninsured because the FDIC will combine the three accounts, which have a total balance of $270,000.

Because the FDIC insurance amount of $250,000 applies to deposits in different categories of ownership, a bank customer who has multiple accounts may qualify for more than $250,000 in insurance coverage–if the funds are deposited in different ownership categories and the requirements for each ownership category are met.

It is important to note that the designation of a beneficiary can change the legal category of an account. When a single account has designated one or more beneficiaries who will receive the deposit when the account owner dies, the account will be insured as a Revocable Trust Account. Therefore, if a customer holds two single accounts (checking and savings) and converts one into a revocable trust account by adding a beneficiary, the customer will receive up to $250,000 insurance for each account, thus maximizing the FDIC coverage. Since a revocable trust account is deemed a separate ownership category, the FDIC would extend coverage to each account up to $250,000. For example, a customer holding a total of $450,000 in accounts within the same ownership categories: $250,000 in a savings account and $200,000 in a checking account is insured by the FDIC for a total of $250,000 for both accounts –leaving $200,000 of the customer’s deposits uninsured.

However, if the customer names a beneficiary to a savings account, then the savings account, payable on death to a beneficiary, becomes a Revocable Trust Account. Because the Revocable Trust Account and the checking account belong to distinct ownership categories, each account is independently insured by the FDIC. In this case, the customer’s total amount of $450,000 is fully insured. Also note that naming a beneficiary provides the added benefit of bypassing the probate process on the assets held in the account. This means that the money in the account becomes the personal property of the beneficiary the moment the owner of the account passes away.

Without the beneficiary designation, the total insurable amount for both single accounts will be $250,000, since accounts within the same category are totaled for FDIC purposes. The designation of beneficiaries is a financial strategy that can allow a bank customer to increase insurance limits on deposits held at a single bank.

Insurance coverage for revocable trust accounts is calculated differently depending on the number of beneficiaries named by the owner, the beneficiaries’ interests and the amount of the deposit. The FDIC relies upon two calculation methods to determine insurance coverage of revocable trust accounts. One method is used only when a revocable trust owner has five or fewer unique beneficiaries. The other method is used when an owner has six or more unique beneficiaries.

When a revocable trust owner names five or fewer beneficiaries, maximum deposit insurance coverage for each trust owner is determined by multiplying $250,000 times the number of unique beneficiaries, regardless of the dollar amount or percentage allotted to each unique beneficiary. A revocable trust with five unique beneficiaries is therefore, insured up to $1,250,000.

If the bank customer names six or more unique beneficiaries, and all the beneficiaries have an equal interest in the trust, the insurance calculation is the same as for revocable trusts that name five or fewer beneficiaries. The account is covered up to $250,000 for each unique beneficiary. In the case of one account owner and six beneficiaries with equal beneficial interests, the owner’s maximum insurance coverage is up to $1,500,000.

However, if a bank customer names six or more beneficiaries and the beneficiaries do not have equal beneficial interests, i.e., they are allocated different amounts, the revocable trust deposits are insured for the greater of either: (1) the sum of each beneficiary’s actual interest in the revocable trust deposits up to $250,000 for each unique beneficiary, or (2) a minimum coverage amount of $1,250,000.

In cases where the trust has more than one owner, each owner’s insurance coverage is calculated separately. Please refer to the FDIC’s brochure, website or contact the agency directly to learn about beneficiaries, ownership categories and requirements a depositor must meet to qualify for insurance above $250,000 at one insured bank. https://www.fdic.gov/deposit/deposits/brochures/your-insured-deposits-english.pdf.

Note that while some self-directed retirement accounts, like IRAs, permit the owner to name one or more beneficiaries, the existence of beneficiaries does not increase the available insurance coverage. To find out if your assets are fully protected, the FDIC provides an online EDIE (Electronic Deposit Insurance Estimator) calculator, which will let you run scenarios to establish if you are protecting your assets by showing how much cash you would recover in the event of a bank collapse.  https://edie.fdic.gov/.

To confirm whether the FDIC insures a specific bank, a customer can call the FDIC, use the FDIC’s “Bank Find” at http://research.fdic.gov/bankfind/ or look for the FDIC sign where deposits are received.

Depositors do not need to apply for FDIC insurance. Coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution. If you are interested in FDIC deposit insurance coverage, simply make sure you are placing your funds in a deposit product at the bank.

The information contained in this article was prepared as of June 21, 2019.  For additional information contact the Federal Deposit Insurance Corporation (FDIC) website at https://www.fdic.gov/.  If you have any questions or comments about this article, I can be reached at riverac@jgua.com.

By |2019-08-21T11:02:47-05:00August 19th, 2019|The Blog @JGUA|