FDIC Insurance Explained

With all the goings-on at the Silicon Valley Bank, I thought I’d do a post on FDIC insurance since the topic has come up in a few client phone calls lately. 

The Federal Deposit Insurance Corporation insures bank deposits up to a $250,000 limit per registration per bank.  Let me break this down. 

FDIC insurance is for bank deposits only

$250K limit per registration.  This means that if I have money in an account titled to me, meaning my name is on the account, that is one registration and I have coverage up to $250K. The amount insured in each category includes accrued interest up to the date of the default.  So if I had a CD that has 18 more months to go, I would be insured for the amount of the CD plus the interest accrued up to the $250K limit. 

If I also have an IRA at the same bank, that is a separate registration, and an additional $250K of coverage.

If I have a joint account with my wife, we each have $250K of coverage on that account.  So a joint tenants account with a $500K balance would be fully insured.  If I also have a joint tenants account with my daughter in the amount of $500K, then only her half has full FDIC insurance, because I’ve used up my limit in the joint account with my wife.   

If I have a revocable trust account, in the banking world usually called a POD or payable on death account, there is $250K of coverage for the owner per beneficiary.  So if I have a $1.0m POD account payable to each of my four children equally, that account is fully insured.  Likewise, an irrevocable trust also has $250K of coverage for each unique beneficiary. 

Corporations and partnerships are each insured for $250K.

There are some other categories, but these are the main ones to concern clients.  But do note:  this insurance is per registration per bank.  So If I want to insure $750K of deposits in accounts registered to me as an individual, I need to go to three different banks to deposit $250K in each one.  Not different branches, mind you – different banks.  So, Chase, Truist, and Wells Fargo, for example. 

Online Banks

How about online banks?  We’ve recently been recommending our clients find an online bank to hold their emergency funds, because the interest credited there is much higher than in a bricks-and-mortar bank.  American Express Bank (currently 3.75%), Ally Bank, and Capital One bank are all good candidates.  The good news:  they all offer FDIC insurance. 

What happens if a bank does fail?

So what would happen in the rare event of a bank failure?  The FDIC would step in and promptly either send a check to the depositor for the insured amount, or open an account for insured amount at a different bank for the insured amount.  If it is a straightforward case, this would happen in a matter of days. 

It would also act as receiver, meaning it would liquidate bank assets to recoup its losses. 

Your strategy

The FDIC has a calculator on its website where depositors can enter their data and see exactly how much of their deposits have FDIC insurance. Even if you're under the threshold there may be wisdom in splitting your money up between banks if you hold large sums on deposit.  Maybe your bank is in the news for being on a regulator's watch list.  People start to withdraw money.  The bank can't handle the withdrawals and is declared insolvent.  This, along with many other factors, is what happened at SVB in California.  So split it up.  Mother's wisdom:  something about eggs and baskets, right?  

Best to all,

--Glenn J. Downing, MBA, CFP®

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