October 11, 2024 • By Dennis Beaver
There are a lot of people–especially older Americans–who do not trust, or just do not want to have their retirement funds at risk of loss in the stock market. And so they place their money in various accounts at banks insured by the FDIC, the Federal Deposit Insurance Corporation.
This incredibly important, independent agency of the United States government has just celebrated its 90th anniversary, protecting bank depositors against the loss of insured funds in the event their bank or savings association fails.
It is important to understand how the FDIC has proven itself critical to the stability of not only our banking system – and, no exaggeration, our entire financial system. Let’s take a look at why and when the FDIC was established. Two words help explain why.
Bank Run
A bank run occurs when a large group of depositors–fearing their bank will become insolvent–withdraw or attempt to withdraw their money at the same time We’ve all seen photos of thousands of people in long lines–hoping to get their money out of banks during the 1930s Depression and the Great Recession of 2008.
As only about 13 percent of a bank’s assets are in cash that can quickly be depleted. If the institution can’t sell assets quickly enough to meet depositors’ deposit demands, failure can result.
In the 1930s Depression, more than 9,000 banks failed, replacing family’s life savings with poverty and fear. Billions of dollars evaporated.
There was no national deposit insurance system in the U.S. at that time. Recognizing the need to protect bank depositors, President Franklin Roosevelt signed the Banking Act of 1933, creating the FDIC. Funded–not by taxpayers, but through assessments on banks themselves–“the FDIC continues its mission to maintain stability and public confidence in our nation’s financial system and gives Americans the peace of mind their funds were protected.”
How Does Deposit Insurance Work? What’s Covered? What’s Not?
Unlike other types of insurance, just by opening a deposit account at an FDIC insured bank or financial institution, you are automatically covered.
Here are examples of deposit products which are insured by the FDIC:
Money in checking and savings accounts, certificates of deposit, money market deposit accounts, prepaid cards, cashier’s checks, money orders and other official items issued by a bank, negotiable order of withdrawal (NOW) accounts.
However, even if purchased through an FDIC insured bank, these are not insured: stock and bond investments, mutual funds, crypto assets, life insurance policies, annuities, municipal securities, safe deposit boxes or their contents.
What are the Limits of Coverage?
Of course, virtually every type of insurance has limits of coverage – how much will be paid in the event of a covered loss. To learn how this works with insured bank products, I spoke with Washington DC-based Martin Becker, Chief of Deposit Insurance at the FDIC.
“Deposits are insured for up to $250,000 per depositor, per account ownership category, per FDIC-insured bank,” Becker points out, adding, “and the limits of coverage increase by $250,000 with additional beneficiaries on the account, up to a maximum of $1.25 million under the trust category, at one institution.”
“Recently we have simplified the rules for trusts. For your readers with large amounts of money wanting FDIC protection, this is certainly possible if the accounts are correctly set up,” Becker said.
The FDIC has an online tool “EDIE” that has been used by millions of consumers in determining their coverage. I also recommend spending time on our website that explains FDIC deposit insurance ownership categories:
www.fdic.gov/resources/deposit-insurance/financial-products-insured
“Additionally, we have customer service representatives who are able to answer your questions. Just call 877-275-3342 (877-ASK-FDIC)
Recent FDIC Coverage Changes Limit the Number of Beneficiaries
Timing is everything, and the next day after my interview with Martin Becker, 89 year-old Martha phoned my office, upset.
“Mr. Beaver, I have a great deal of money in a bank savings account with eight family members as beneficiaries when I die. A financial advisor I met last year just called and told me that the FDIC coverages had changed and I needed to meet with him to discuss placing some money in stock market investments. Is that correct?”
“Martha, what you were told is nonsense! Yes, the FDIC did make some changes, but nothing requires you to get into the stock market. Each account owner is insured up to $250,000 for each beneficiary, with a maximum of five beneficiaries and a total of $1.25 million insured, per financial institution.”
I related to Martha what Martin Becker advised in this situation. Simply open a new account at a different bank, or several banks. Since Martha has eight beneficiaries, she would be insured for a total deposit amount per bank of $1.25 million. It is important to remember, your deposits are separately insured at each FDIC member bank.
The people at the FDIC really are from the government and here to help.
Dennis Beaver Practices law in Bakersfield and welcomes comments and questions from readers,
which may be faxed to (661) 323-7993,
or e-mailed to Lagombeaver1 – at – Gmail.com.