How Does FDIC Coverage Work?
Have you heard news about the recent banking crisis? Are you wondering if your money is safe at your bank? Do you have questions about how FDIC coverage works?
Banks are somewhere that we’re supposed to put our money and feel safe. Most of us don’t want to keep our money under the bed in a shoebox. Therefore, we put our money into the bank for safe keeping. Now, the bank does pay us interest and they do provide other banking services. But if we don’t feel like our money is safe, then nothing else really matters.
Key Points
The FDIC is a federal agency that provides deposit insurance to people who keep their money in American banks. Therefore, in the case of a bank failure, the FDIC will insure your deposits (up to the FDIC limits).
The size of a bank can influence how safe it is. In some cases, this can have an impact on how safe your money is at your bank.
SPOILER ALERT: Generally, as long as your money in the bank with within FDIC insurance limits, then your money is probably safe.
FDIC
Let’s start with FDIC coverage and how it works. We’re going to cover this first because in order to answer if your money is safe, we’ll first need to understand FDIC.
FDIC stands for Federal Deposit Insurance Corporation. This is a federal agency that provides deposit insurance to people who keep their money in American banks. The FDIC was created in 1933 during the Great Depression. The purpose of the FDIC was to restore trust in the banking system which was lost during the Great Depression. This is because during the Great Depression many banks ended up failing…and when those banks failed, many people lost their entire life savings.
So basically, if a bank fails, the FDIC will insure (or cover) your deposits…up to the FDIC limits.
FDIC Coverage on Personal Accounts
FDIC coverage can be split up into two sections. The first section is for personal consumer accounts. When we say personal consumer accounts, this means accounts that are set up for people, as opposed to a Corporation or an LLC. So, this includes personal checking, savings, CD’s, and more.
When it comes to personal accounts, the FDIC covers $250,000 per account owner, per bank. So, a personal account with just one owner would include $250,000 in FDIC coverage. An account opened with a husband and wife would have two account owners. Therefore, this would include $500,000 in FDIC coverage.
On personal accounts, the FDIC coverage can be further increased by adding beneficiaries to the account. Beneficiaries are the people (or person) who you will leave your account to, when you pass away. For many people, their beneficiaries are their children. So, an account set up with a husband and wife and kids as beneficiaries could add additional coverage. However, how the coverage works with beneficiaries can get tricky. So, we recommend checking out an FDIC website that provides a calculator to help with your individual situation.
CLICK HERE to calculate your FDIC Coverage! Or, KEEP READING BELOW…
FDIC Coverage on Business Accounts
Now let’s move on to FDIC coverage for business accounts. But before we do so, we understand that most people probably don’t have a business account. So, you might be wondering if this matters to you. Well, business accounts are handled differently than personal accounts. This is important because this difference was a major factor in the current mini-banking crisis. Which means that this difference is probably what led to you even wonder if your money is safe at your bank.
FDIC coverage for business accounts is capped at $250,000 per business, per bank. This applies to all business types, including LLC’s, Corporations, Partnerships, and more. The only exception here is that any business organized as a Sole Proprietorship is classified as a personal account for the purpose of FDIC coverage. But besides that, this information applies to all business accounts.
Remember, on a personal account, the FDIC coverage limits can be increased by adding owners or beneficiaries. However, this is not the case with business accounts. On a business account, the only way to increase FDIC coverage is to spread the deposits out over several different banks. This can cause some problems. Especially because $250,000 isn’t necessarily a lot of money for a business.
So, what do these businesses do?
Well, the answer is that there’s really no good answer. Let’s say you’re a business with $1,000,000 in the bank. Sure, you can spread that money out over four different banks. But that comes with the issue of having to manage four different accounts at four different banks. This will include four different mobile apps, four different logins, and four different monthly statements. Also, banks really like it when you keep most of your money at their bank. A business with high deposits at one bank will likely receive a higher level of service, higher interest rates, and more access to business loans.
So, many businesses do decide to leave all their money with one bank, even though it’s uninsured. Which obviously isn’t a great option at all. This is something that’s really come to light after the recent collapse of a few banks, including Silicon Valley Bank.
"Systemically Important" Banks
This leads us to our next topic, which is individual bank safety. Generally, the larger the bank, the safer the bank. This is because there are certain large banks that the government categorizes as “systemically important” banks. These are banks that are viewed as systemically important to the overall economy and banking system. You can think of these banks as “too big to fail”. This means that if these banks ever experienced trouble and were in danger of failing, the government would probably provide support. So, the larger a bank, then the more likely support is to occur. But the smaller the bank, then the least likely that the government would provide support. This is because a smaller bank is probably not deemed as systemically important. In fact, when a small bank fails, usually no one pays attention. But if a large bank like Chase or Bank of America were to fail, it would cause massive ripples throughout the economy.
We bring this up because if your money in the bank is OVER the FDIC insurance limits, then the safety of your bank might matter. In this case, having your money with a larger, stronger bank probably provides an extra layer of protection.
Now, we’re not saying to take all your money out of smaller banks and move it into a big bank. But we are saying that if your deposits at any one bank are above the FDIC limits, then you should absolutely have an understanding of how safe, stable, and systemically important that bank is. Basically, you should feel a lot more comfortable having uninsured deposits with Chase than with a local bank that only has one branch.
So, is My Money Safe?
The short answer to that question is simple. Because if your money is UNDER the FDIC insurance limits, then your money is probably safe. However, if any of your money is OVER the FDIC limits, then it’s possible that your money might not be safe in the event of a bank failure. In this case, we recommend understanding the overall safety and stability of the bank you choose.
We’ve done our best to provide general information about how to protect your money and ensure that your money is as safe as possible. However, keep in mind that no one can predict the future so we don’t know what will happen tomorrow. Just in the past few years, we’ve seen a global pandemic, massive inflation, and threats of world war. Also, during the Great Recession in 2008, even some major banks were on the brink of collapse. So, anything can happen. The best thing that we can do is educate ourselves around FDIC coverage and the overall safety of the banks that we choose.
We would love to hear how you feel about the current mini-banking crisis. Do you feel like your money is safe at your bank? If not, what steps have you taken?
Thank you again for taking time out of your day so that we can help you become your own financial hero! We hope to see you again soon.