Personal Finance 101: What Does FDIC Insurance Really Mean?

One of the biggest things I encourage people to look for when they open a bank account is that the bank is FDIC insured. Most banks operating in the United States offer this insurance. In an era where people are more than a little worried about bank failures and the like, FDIC insurance is vital.


But what exactly is it?

Charlie writes in:

What exactly is FDIC insurance? How does it work? [A local bank] went under recently and seems to have been bought out by another bank and from what I understand the accounts are intact. Is that FDIC insurance at work?

(I edited out the bank in Charlie’s question for privacy reasons.)

What Is FDIC Insurance?

FDIC insurance refers to insurance policies created by the Federal Deposit Insurance Corporation, which is an organization wholly run by the government of the United States. The FDIC sells insurance policies to banks which insures the checking and savings accounts at those banks against the failure of those banks. Thus, when you open an account with a bank, that bank purchases insurance on that account for you from the FDIC.

FDIC insurance covers checking accounts, savings accounts, certificates of deposit, money market accounts, and cashier’s checks. It does not cover stocks, bonds, mutual funds, money market accounts, US treasuries, safe deposit box contents, or other such items.

Most banks that operate in the United States buy this insurance. When they do, they’re required to display the FDIC logo on signs in their business as well as on their websites.

FDIC insurance insures deposits up to $250,000 per depositor. This means that if your bank fails, the first $250,000 in your account is insured by the FDIC and will be returned to you in the event of a bank failure.

What Happens If My FDIC Insured Bank Goes Under?

If a bank that offers FDIC insurance becomes insolvent, the FDIC takes over that bank and all of the accounts held there. One of two things then happens.

In one type of takeover, called the “purchase and assumption” method, an already-existing bank takes over the accounts of that bank as well as some (or all) of the loans that bank has given out to customers. This purchase is usually done quickly. For you, the customer, this means that one morning, you’ll wake up and your bank account will be with a new bank. This is what happened when Wachovia failed and was taken over by Wells Fargo, for example.

In another type of takeover, called the “payout” method, the FDIC liquidates everything that’s left in the bank and then issues payouts for insured amounts to customers. So, if you have less than $250,000 in your accounts, you’d receive the full amount – if you had more, you’d just receive $250,000.

In either case, the process is really straightforward, usually involving minimal hassle from the customer. At most, you’ll simply need to open an account at a different bank (if your bank isn’t bought out or if you don’t like the new bank).

What If My Bank Doesn’t Have FDIC Insurance?

If your bank fails, you’re out of luck. You get nothing at all.

This is the reason why I encourage people to use banks that provide FDIC insurance. Luckily, almost all banks in the United States do offer it, but it’s worth checking just to make sure.

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