What is FDIC? How It Works

What is FDIC? How It Works:

Federal Deposit Insurance Corporation (FDIC) is an independent agency of United States Government. Its primary work is to insure bank deposits of general public. When a bank fails to return your deposit money, the FDIC will take the charge. The FDIC will give your deposit money up to the ceiling limit set for deposit insurance.

Basically FDIC’s work is to motivate people to make bank deposits without any fear. As a customer, you expect guarantee on your bank deposit. The bank provides you the deposit documents in writing, but what will happen if the bank goes into liquidation. In such circumstances, your deposit money is insured by FDIC and therefore you will get your money no matter what is the financial condition of your bank.

Who is FDIC?

FDIC is a US government organization that provides deposit insurance to FDIC Insured Bank Customers. FDIC Insurance is backed (financially supported) by full faith and credit of the United States Government.

Federal Deposit Insurance Corporation was created in 1933 as an independent agency of the federal government. During the decades of 1920s and 1930s, so many bank failures happened in United States. At that time, the US Government realized that they need to start a new organization that takes care of depositors/people’s money. From 1934 to present, not a single depositor’s money is lost because of bank failure.

The Concept of Deposit Insurance

FDIC insures the deposit money of depositors up to $250,000 when a bank or depository institution fails to return. The FDIC Deposit Insurance includes principal amount of deposit plus any interest accrued or due to the depositor. The interest will be calculated from the date of deposit or last interest paid date to the date of bank default. The FDIC is bound to pay deposit money plus interest with total payment limit of $250,000.

Example I: You have deposited $180,000 in your bank for five years. The bank defaults after six months. FDIC Deposit Insurance will cover your deposit and pay you $183,000 ($180,000 principal plus $3000 interest).

Example II: You have deposited $245,000 in your bank for five years. After two years, the bank defaults. In such circumstances, total payable amount is $255,000 ($245,000 principal plus $10,000 interest). But the FDIC will pay up to its maximum limit per deposit i.e. $250,000.

How FDIC Works on Deposit Insurance

When a bank fails or defaults, the FDIC takes responsibility of deposits up to the ceiling limit. FDIC Deposit Insurance provides insurance for every depositor up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

In bank failure circumstances, the bank goes into liquidation. All assets of the bank are put in market for sale. FDIC provides deposit insurance by paying the deposit money (not exceeding $250,000) by check or provide every depositor a new deposit account at another FDIC insured bank with same amount not exceeding $250,000.

If your deposit plus interest total is more than $250,000 then you will receive your money in two parts. The FDIC will pay you $250,000 i.e. the insured amount by check or another deposit account. The remaining amount will be paid by the bank as and when bank’s assets will be sold. This process may take years and the bank may pay you remaining amount in installments or pro-rata basis.

How to Get FDIC Deposit Insurance

FDIC Deposit Insurance is not a separate insurance like life insurance, vehicle insurance and others. You cannot buy the FDIC Deposit Insurance as it does not have a separate identity or existence. When you open a deposit account at an FDIC Insured Bank or FDIC Insured Financial Institution, your deposit is automatically covered by FDIC Deposit Insurance.

What is Covered and What is Not Covered in FDIC Deposit Insurance

Federal Deposit Insurance Corporation is established to provide insurance cover to FDIC insured bank deposit accounts. But it does not mean that FDIC covers all financial products provided by the FDIC insured bank. Here we provide the list of products which are covered and not covered under the criteria of FDIC Deposit Insurance.

Financial Products Covered under FDIC Deposit Insurance Financial Products Not Covered under FDIC Deposit Insurance
Traditional Types of Bank Deposit Accounts Investment Products that are Not Deposits.
Checking Accounts Mutual Funds
Savings Accounts Annuities
Money Market Deposit Accounts (MMDA) Life Insurance Policies
Certificates of Deposit (CDs) Stocks and Bonds

Are All Banks and Financial Institutions FDIC Insured?

It is true that major banks and financial institutions in USA are FDIC Insured, but not all banks. You should check if the bank is FDIC Insured before opening a deposit account there. Kindly follow the procedure mentioned below to find out all banks and financial institutions which are insured by FDIC.

  1. Go to FDIC Bank Find Tool.
  2. Enter your desired bank name, address, city, state, zip code and bank url.
  3. Click on Search button to find out its detailed information.
  4. Check if your bank is FDIC insured or not.

How to Get FDIC Insured Deposit More than $250,000

The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. If you wish to get insurance cover above $250,000 then you should open deposit accounts with different ownership. You can also open deposit accounts under same ownership with different beneficiaries where the deposit amount is payable on death of the depositor.

Check If Your Deposit Account is Fully Covered

You need to use FDIC’s Electronic Deposit Insurance Estimator (EDIC) to get details of your deposit account’s insurance coverage. You can do the same by contacting FDIC Helpline at 1-877-ASK-FDIC (1-877-275-3342). The FDIC Insurance Specialist Personnel will tell you everything about the deposit insurance coverage.


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