How Does Deposit Insurance Work?

How Does Deposit Insurance Work?

When you deposit money at a bank or credit union in the United States, your funds are guaranteed up to a standard amount of $250,000 by one of two government agencies: the Federal Deposit Insurance Corporation (FDIC), which insures and monitors banks, and the National Credit Union Administration (NCUA), which does the same for credit unions. Your coverage limit can be higher if you have multiple accounts of different kinds, or have accounts at multiple institutions.

Although a number of banks and credit unions fail every year, not a single bank customer or credit union member has lost a penny of deposits that were properly covered by the FDIC or NCUA.

Which Accounts Qualify for Deposit Insurance

Only deposit accounts are covered by federal insurance. Generally speaking, any asset which carries a risk of losing the money in your original balance, such as a fund, bond, stock or security, will not be covered. In contrast, accounts that guarantee at least the return of your original balance —like certificates of deposit or money market accounts —are always covered, as long as the issuing bank or credit union participates in deposit insurance. The most common insured accounts are personal checking accounts and savings accounts.

Accounts Covered by FDIC/NCUA Insurance
Accounts Not Covered
  • Checking and share draft accounts
  • Savings and share accounts
  • Interest-bearing checking (NOW) accounts
  • Money market accounts (MMAs)
  • Certificates of deposit (CDs) and share certificates
  • Official bank-issued items (cashier's checks, money orders, etc.)
  • Annuities
  • Mutual funds
  • Stocks
  • Bonds
  • Government securities
  • Municipal securities
  • U.S. Treasury securities

Categories of Insured Deposit Accounts

Should a bank or credit union become insolvent and unable to return your deposit, the FDIC or NCUA promises to compensate an individual up to $250,000 per deposit category, per insured deposit institution (IDI).

The categories for deposit account types are numerous and sometimes complex, but most consumers will only need to note the single, joint, retirement and benefit accounts. Banks and credit unions use the same categories, although the NCUA may use slightly different terms, such as "share" and "share draft" accounts.

Account Type
Coverage Limit per Institution
SingleOwned by or held on behalf of one individual with no named beneficiaries; a sole proprietorship's business account; account representing a decedentIndividual checking account; Individual savings account; Minor savings account; Sole proprietor's business checking account$250,000 per owner
JointOwned by two or more living people with equal withdrawal rights, signatures on the account, and no named beneficiariesMarried couple's checking account; Parent-child checking account$250,000 per co-owner
Certain RetirementOwned by a plan participant who has the right to direct the investment of moneyIRAs; 401(k) accounts; Keogh plan accounts$250,000 per owner
Revocable TrustOwned by one or more individuals who have a designated beneficiary in the event of deathLiving trust accounts; Payable on Death (POD) accounts; In Trust For (ITF) accountsEach owner insured for $250,000 per designated beneficiary
Irrevocable TrustHeld by a grantor with no rights over deposited assetsWritten trust agreement; Statute-established trust$250,000 per trust account and $250,000 per beneficiary across all non-contingent interests in trusts established by same owner
Employee Benefit PlanRepresents a plan in which a plan administrator makes investment decisionsPension fund; Defined benefit plan $250,000 per non-contingent interest of each participant
Corporation, Partnership, or Unincorporated AssociationOwned by for-profit or non-profit corporations, partnerships, and unincorporated associationsAny account tied to the organization that has a primary purpose other than to increase FDIC deposit coverage$250,000 per corporation, partnership, or association, apart from owner/member personal accounts
GovernmentOwned by a public unit of the United StatesUnited States federal agencies; states, counties and municipalities; District of Columbia, Puerto Rico and government possessions and territories; American Indian tribes $250,000 per official custodian or more depending on deposit type and location of the public unit

Credit union insurance for trust accounts requires that at either all the owners or all the beneficiaries are members of the credit union.

How to Calculate Your Deposit Insurance Coverage

The FDIC and NCUA offer online tools for finding out how your various accounts are covered under the rules of deposit insurance. The Electronic Deposit Insurance Estimator (EDIE) for banks and Share Insurance Estimator for credit unions can give you an informal estimate of your total covered amount across all categories. Note that there may be additional forms and applications required to qualify in multiple categories if you find yourself actually claiming deposit insurance.

Depending on the type of accounts you hold at a single bank, your money may be insured to an amount several times more than the nominal limit. For instance, you might have six separate accounts across two different banks:

  • Personal checking account at Bank A
  • Personal savings account at Bank A
  • Personal checking account at Bank B
  • Joint checking account at Bank A
  • Minor savings account at Bank A
  • 401(k) account at Bank A

As an individual owner, you have $250,000 in coverage for the combined checking and savings balances at Bank A. FDIC coverage resets at each deposit institution you bank with, so your second checking account at Bank B will be insured for another $250,000.

Meanwhile, the joint account you hold with your partner at Bank A is covered up to $500,000 —that's $250,000 per account owner, calculated separately from your individual accounts at Bank A. The minor savings account for your child's college tuition, also at Bank A, is technically owned by your child, who qualifies for FDIC coverage as a separate account holder for another $250,000.

Finally, your 401(k) account, yet again at Bank A, falls under the Certain Retirement account category, and therefore receives its own $250,000 insurance limit. The result is a deposit insurance limit of $1,000,000 for your five accounts at Bank A and $250,000 for your one account with Bank B.

What Happens When Banks and Credit Unions Fail

The FDIC and NCUA manage insurance payouts on behalf of the account holders; if an insured bank or credit union closes its doors, its customers automatically receive deposit insurance payments with no extra action required. As the FDIC or NCUA assumes receivership over the failed institution, it will contact customers using the bank's records and post public notices at the branch locations and in its area of service.

For banks, insurance payouts for deposits typically occur within a few business days of the bank’s closing, while the NCUA promises to reimburse credit union members within 5 days of a credit union closing. Another option that the agencies sometimes consider is merging a failed institution into another insured bank or credit union, where the affected customers receive new accounts with the same balance as their old accounts, up to their individual coverage limits. In such a case, the new bank or credit union will contact the affected customers.

If you are the depositor of a trust account exceeding $250,000, or if a broker established an account for you, then the federal agencies may request additional documentation to determine your actual coverage limit.

How Deposit Insurance is Funded

FDIC insurance is paid out of the Deposit Insurance Fund (DIF), which is maintained through the payment of premiums by each bank. The premium each bank pays is based on the size of its deposits and the level of risk the bank poses. The DIF is invested in the market as well, but it receives no support from tax dollars, meaning that taxpayers do not bear the burden of deposit insurance.

For credit unions, the analog to the DIF is the National Credit Union Share Insurance Fund (NCUSIF), which is funded with deposits and premiums from all federally chartered credit unions and almost all state-chartered unions. The NCUSIF is primarily invested in U.S. Treasury securities.

Both the bank and credit union insurance funds must meet certain deposit reserve ratios: the balance of available money must equal a designated percentage of all insured deposits. The DIF stands at about 2.0% of insured bank deposits, and the NCUSIF stands at 1.2% of insured credit union deposits. These ratios are considered the minimum levels required for deposit insurance to function properly in the face of a major economic crisis, as occurred in 2008 and 1933.

Is My Bank or Credit Union Insured?

Deposit insurance is practically mandatory for any bank or credit union that wants to be competitive in the modern retail banking market. Consumers expect their deposits to be protected from bank defaults, and it's actually harder to find an institution operating without deposit insurance than it is to find one that's covered. In our guides to the best savings and best checking accounts, for example, every bank featured is FDIC-insured.

For the doubters, the FDIC and NCUA offer tools to help look up individual institutions. You can use their sites to find out whether your bank or credit union is insured.