How the FDIC Works

Provided a financial institution is insured by the FDIC, the FDIC protects any depositor—individual or entity—regardless of whether the depositor is a U. S. citizen or resident. Federally chartered banks, as well as some state chartered banks, are protected by the FDIC. If a banking institution is FDIC-insured, it must display an official FDIC sign at each teller station. The FDIC insures deposits that are payable in the United States; deposits that are only payable overseas do not receive FDIC protection. Investments such as stocks or mutual funds are not FDIC protected. Deposits into accounts such as savings, checking, Christmas Club, certificates of deposit (CDs) are FDIC insured, as are cashiers’ checks, expense checks, loan disbursement checks, interest checks, money orders, and other negotiable instruments.

A depositor who has more than $100,000 in deposits is protected only to the extent of $100,000 per FDIC insured institution. This means that consumers who have assets exceeding $100,000 are best served by keeping no more than $100,000 in any one FDIC insured bank. A bank with more than one branch is considered to be one institution, so merely keeping funds in different branch locations may not be safe. For purposes of determining deposit insurance coverage, the FDIC will add all deposits from all branch offices of the same bank for each depositor. Deposits of more than $100,000 maintained in a single banking institution are protected so long as they are maintained in different categories of legal ownership. Examples of different categories of legal ownership include single ownership versus joint accounts, or individual retirement accounts (IRAs), Keogh accounts, or pension or profit-sharing accounts. Different types of accounts, however—checking, savings, certificates of deposit—are not categories of legal ownership. Money contained in separate types of accounts is added together for purposes of determining FDIC insurance coverage.

The FDIC determines legal ownership of bank deposits by examining the bank deposit account records. Assuming those records are unambiguous, the FDIC insurance goes to the individual or entity named. FDIC protection continues for up to six months following the death of a depositor as though the depositor were alive. This protection is important in cases in which the funds of the deceased are left to a survivor whose own bank deposits, combined with those of the deceased, exceed $100,000. Without this protection, the survivor would only receive $100,000 in FDIC insurance; with this protection, the survivor may receive the insurance afforded the deceased depositor as well.

Some states have community property laws, meaning that the property of one spouse may legally be considered as the property of the other spouse as well. Community property laws, however, do not affect the coverage afforded by the FDIC. Even in states that have community property laws, an account held solely in the name of one spouse will not be considered by the FDIC as also belonging to the other spouse. Accounts held in the name of both spouses will be insured by the FDIC as joint accounts. With joint accounts, the interests of each individual are added together and insured by the FDIC to the extent of $100,000. This means that if Mary and Bill have a joint savings account totaling $200,000, the FDIC would completely insure Mary’s portion of $100,000 and would also completely insure Bill’s portion of $100,000.

In the case of retirement funds, such as IRAs and Keogh accounts, the FDIC considers the accounts to be insured separately from other non-retirement funds held by the depositor at the same financial institution. If a depositor has both IRA and Keogh accounts at the same institution, however, those funds will be added together and insured only to the extend of $100,000. Roth IRAs are treated in the same manner as traditional IRAs.

In the case of business accounts, funds deposited in the name of a corporation or other business entity receive the same FDIC protection—up to $100,000—as do individual accounts. A business entity must not exist merely to increase the FDIC protection afforded an individual depositor; the business entity must exist to perform an “independent activity” to receive FDIC protection. When a business entity owns more than one account, even when each account is designated for different purposes, the FDIC will add the total amounts of all accounts and insure the business entity to a maximum of $100,000. This rule also applies if a corporation has separate units or divisions that are not separately incorporated. If a business entity is a sole proprietorship, the FDIC treats deposits of the sole proprietorship as the funds of the individual who is the sole proprietor. Those funds will be added to any other insured accounts held by the individual, and the FDIC will insure no more than $100,000.

In addition to its powers of insuring bank and savings and loan deposits, the FDIC regulates the banking industry and may, after proper notice and a hearing, discontinue its insurance coverage if a bank engages in overly risky banking practices. When this happens, the FDIC requires the bank to provide timely notice to its depositors of the termination of FDIC coverage.

Inside How the FDIC Works