What Is the FDIC? And Why Does It Matter?

Banking
Updated: 29th Sep 2021
Written by Kim Pinnelli
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You’ve likely seen ‘Member FDIC’ on a bank’s door or website and wonder, what is that, and should I care?

You should care so much that you should avoid any bank that doesn’t have FDIC insurance. It’s the only way to protect the money you invest, especially if you deposit a large amount of money in the bank. FDIC insurance is available on both checking and savings accounts as well as many other deposit accounts.

Here’s what you must know.

What is the Federal Deposit Insurance Corporation (FDIC)?

The Federal Deposit Insurance Corporation (FDIC) protects deposits and is responsible for managing most US financial institutions.

The FDIC is an independent government agency that insures individuals’ deposits up to $250,000 should the insured bank fail.

The US government hopes that with the help of the FDIC, consumers will have faith in the banking system.

Quick History of the FDIC

The FDIC was created during the Great Depression when the stock market crashed, and most people withdrew all their savings from the local banks.

The combination of the lack of deposits and the stock market crash made it impossible for most banks to remain in operation.

As banks’ resources diminished, they couldn’t repay clients their money, which caused a rift in society regarding faith in banks.

With the help of President Franklin D. Roosevelt and Congress, the Emergency Banking Act was created, which included FDIC insurance and the allowance of the Federal Reserve to issue currency for insured banks when needed.

How Does the FDIC Work?

The FDIC plays an integral role in protecting your money. When you deposit funds in a bank account, the bank uses the money to invest.

Most banks invest conservatively, but a few may take more risks. Either way, an investment can always fail, which is where the FDIC insurance helps.

If a depositor wants to withdraw funds but doesn’t have them because investments are down, the FDIC provides the funds.

This is also true if the bank fails completely – all depositors would have FDIC coverage of up to $250,000 if the bank is FDIC-insured.

>> More: Check Out the Best Online Banks

What Does the FDIC Cover and Protect?

Like most insurance policies, the FDIC doesn’t cover everything. Before you deposit or invest funds, it’s important to know what’s protected.

What Is Not Covered by the FDIC?

Most banks offer more than checking, savings, CDs, and cashier’s checks. Many of the other products aren’t insured, including:

  • Retirement accounts that include anything other than a deposit account (stocks, bonds, etc.)
  • Annuities
  • Stocks
  • Bonds
  • Mutual funds
  • Contents of a safety deposit box
  • Life insurance

FDIC Coverage Limits

The FDIC coverage limits are a bit complicated. At the surface, it’s $250,000 per person, but it’s actually $250,000 per person per category.

If you have multiple accounts at the same bank, but in different categories, you’re covered up to $250,000 in each category.

For example, if you have a single-owned checking account and a joint-owned checking account, you are covered $250,000 on your checking account (single-owned) and $250,000 per person on the joint checking account, for a total of $500,000 on the joint checking account since it’s per person.

If you have other accounts, such as certain retirement accounts, trusts, or government accounts, you’ll also be covered up to $250,000 on each of the accounts.

How to Confirm a Bank’s FDIC Status

Not all financial institutions are FDIC insured. To date, there are approximately 5,000 banks in the United States that are FDIC insured.

Fortunately, it’s easy enough to find out if a bank is FDIC insured. If you go into the bank, they usually have stickers on the door and at the teller stations.

If you bank online, look at the bottom of a bank’s home page. You’ll see a statement that says ‘Member FDIC’ if they are insured.

You can always call a bank and ask or use the FDIC’s bank finder tool to find an insured bank.

Why Is the FDIC Important?

The FDIC is important for one reason – the safety of your money. Most people don’t realize what goes on behind the scenes when they deposit funds at their bank.

All you see is you earn interest on your money, and when you check your bank account, the balance is there. But that’s on paper.

The bank uses the money you deposited to make money – which is how they pay you interest. They may invest it as we spoke about above.

They may also lend to others, earning interest on the loan. They do this to keep the money cycle flowing, so they continually make money and pay interest.

What happens when you want to withdraw your money to make a big purchase?

If the bank used the money to make a bad investment or lent it out and the borrower defaulted, they may not have your money available.

If your money is at an FDIC-insured bank, though, the bank will turn to the FDIC to pay you.

Worse yet, if the bank closes altogether, you could need up without any money. They’ll pay depositors on a first-come-first-serve basis if money is available, and when it’s gone, it’s gone.

Bottom Line: What Is the FDIC?

Don’t put your money at a bank without FDIC insurance. It’s a gamble that’s not worth taking. There are 5,000+ FDIC-insured banks (and their branches) throughout the United States.

If you bank at a credit union, they have a similar program called the National Credit Union Share Insurance Fund.

Banking at a facility without insurance puts your money at risk and isn’t a smart way to invest your funds.

It doesn’t cost you any money to bank at these facilities, and you benefit from protecting your funds.

Kim Pinnelli
Kim Pinnelli
Kim is a personal finance expert with a Bachelor’s degree in Finance from the University of Illinois at Chicago. She has been freelance writing for 13 years for a number of large publications. Kim thoroughly enjoys helping people take charge of their personal finances.