FDIC Insurance Coverage

When the banking industry is experiencing turbulent times, it's comforting to know that the Federal Deposit Insurance Corporation, or FDIC, is providing depositors with protection against the loss of their money.  Even more comforting is the fact FDIC insurance coverage is backed by the United States government.

In this publication, we're going to review the insurance limits the FDIC has established for deposits held with FDIC insured banks.  As part of that discussion, we'll run through the rules that apply to single accounts, joint accounts, retirement funds, as well as deposits of small corporations.  But first, we'll start with a brief history of the FDIC itself.

Federal Deposit Insurance Corporation

The FDIC was created by the Glass-Steagall Act in June 1933.  The act gave the newly established FDIC the power to oversee the commercial banking industry.  The system was launched following the bank panics of 1933, and the thousands of bank closings that followed.

The original limit on deposit insurance stood at $2,500 back in 1933, but over time the insurance limit has increased as demonstrated in the table below:

FDIC Insurance Limits

It's interesting to note, that until the announcement in October 2008 to raise the insurance limit, the system had gone 28 years without an increase.  It's also important to note that the increase to $250,000 is temporary.  Unless extended, or permanently changed by law, the $250,000 limit is set to expire on December 31, 2013, except for retirement deposits which were permanently increased in April 2006 to $250,000.

Categories of Account Ownership

The FDIC recognizes different categories of ownership and applies the insurance limit to each category.  For example, a married couple can hold multiple accounts at the same bank under different categories of legal ownership, each of which has its own limit.

The table below demonstrates this point.  Here we have John and Jane holding five savings accounts at one FDIC insured bank:

The above example demonstrates that under the "ideal" conditions, couples could enjoy up to $1,500,000 in FDIC insurance at the same bank.  That's because of the way the accounts were spread over three different ownership categories.

For a better understanding of just how these insurance categories are defined, we've explained each one in more detail below.

FDIC Insurance on Single Accounts

Perhaps the least complex category of deposit insurance applies to single accounts, which is an account that is owned by one person.  More precisely, we're talking about accounts held in one person's name, or accounts established for one person by another agent, guardian, or custodian.  A single account also includes bank accounts held in the name of a business, but owned by a sole proprietorship.

The total of all deposits held by one person, at the same bank, are insured up to $250,000.

FDIC Insurance on Joint Accounts

When a deposit is owned by two or more people, it's considered a joint account.  Legal entities such as corporations, estates or trusts are not people, and therefore do not qualify under the FDIC rules for joint accounts.

An account is considered to be held jointly if all owners enjoy equal rights to withdraw money from the account.  Each owner of the deposit must also sign the account signature card.

The total value of the eligible insurance is the total of all co-owners share of the account.  The FDIC limit on jointly held accounts is the number of co-owners times $250,000.  For example, if an account is held by a husband and wife, then the account would be fully insured up to $500,000.  That's because each co-owner is insured for up to $250,000.

It is not possible to increase the amount of insurance coverage by re-arranging the order of the owner names or otherwise changing the way each name appears on the account.  In addition, the FDIC assumes an equal share of jointly-held accounts unless the account records specifically outline a different ownership arrangement.

FDIC Insurance on Retirement Accounts

Back in April 2006, the law raised the limit of FDIC protection for retirement accounts to $250,000.  The retirement account limit will not expire on December 31, 2013.  Retirement accounts include Roth IRAs, traditional IRAs, Simplified Employee Pensions (SEP), SIMPLE IRAs, Section 457 deferred compensation accounts, 401k plans, and self-directed Keogh plans.

It's important to understand that even if an IRA is held at an FDIC insured institution, the insurance coverage only applies to traditional savings accounts and certificates of deposit.  Investments such as stocks, bonds, mutual funds and annuities are not insured.

The total insurance is $250,000 for all retirement accounts that are owned by the same person at the same FDIC insured bank.

FDIC Insurance for Partnerships / Corporations

For-profit and not-for-profit corporations as well as partnerships all fall under the same FDIC ownership category.  Qualifying corporations need to be engaged in activities other than operating for the sole purpose of increasing FDIC insurance coverage.

Operating structures such as sole proprietorships do not qualify as corporations under this category of FDIC coverage.  Instead, they are counted towards the single account coverage mentioned earlier.

All accounts ultimately owned by the same corporation or partnership (such as divisions and / or business units) are added together and insured up to the $250,000.

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