What is FDIC insurance and how does it work? 

When you deposit money into a bank account, you expect that money to stay there until you withdraw it. But how can you be certain your money will be safe if the bank runs into trouble? That’s where FDIC insurance comes in. 

“FDIC insurance ensures the safety of depositor funds up to a certain amount and promotes stability in the United States banking system,” explains Jason Koontz, an independent consultant with decades of experience in the banking sector.

FDIC-insured accounts, like those offered by FDIC member Discover Bank^®, are protected up to $250,000 per depositor, per account ownership category, in the unlikely event of a bank failure. You probably have a lot more questions about FDIC insurance, so let’s dive into some answers.

What is FDIC insurance?

First, let’s start with what FDIC stands for: Federal Deposit Insurance Corporation. Managed by this independent government agency, FDIC insurance is a program designed to protect deposits against the possibility of bank failures.

Banks can apply for FDIC deposit insurance and, assuming they meet the standard for approval, pay premiums to the FDIC for coverage. FDIC protection is backed by the full faith and credit of the United States government and assures that even if a bank fails, depositors won’t lose their protected funds.

Why was FDIC insurance created?

The first deposit insurance programs in the United States were initiated and deployed at the state level. Starting with New York in 1829 until 1917, 14 states implemented plans to protect bank deposits and similar accounts. These programs were intended to protect depositors from bank failures and guarantee communities’ financial stability. 

These efforts fell short, however, and by 1933, thousands of banks had closed and the entire U.S. financial system was faltering. Because past efforts to establish some sort of federal deposit insurance program had been unsuccessful, bank customers were left unprotected. Depositors lost $1.3 billion as a result of the thousands of bank failures stemming from the financial crash that led to the Great Depression. Considering inflation, that amount would currently equate to about $27.4 billion, according to the Pew Research Center.¹

In response, Congress passed the Banking Act of 1933, and President Franklin D. Roosevelt signed it into law. The act officially established the FDIC to restore confidence in the banking system and prevent further financial collapse. Since then, “no depositor has lost a penny of insured funds as a result of a failure,” according to the agency.

How does FDIC insurance help consumers?

While the FDIC insures banks, individual consumers benefit too. 

“FDIC insurance benefits U.S. banking customers (citizens and foreigners) by providing peace of mind and confidence that their deposits are protected up to $250,000 per depositor, [per account category], per insured bank,” Koontz says. “In the event of a bank failure, the FDIC steps in to ensure depositors’ funds are reimbursed promptly, maintaining stability and helping to prevent panic in the banking system.” 

Koontz explains that this protection applies to the accounts of individuals, families, and businesses and that it promotes trust and participation in the U.S. banking system. Bank customers don’t need to apply for FDIC insurance; they only need to make sure their bank is FDIC-insured.

You can usually find out if a bank is FDIC-insured by checking its website. Or you can search the FDIC database to find certified institutions in your area. 

How does FDIC insurance work?

So, what does the FDIC do when an insured bank fails? Koontz explains that after a bank failure, the FDIC will take over as the custodian and manage the bank to minimize disruption. 

“While this can happen on any day of the week, the FDIC often takes over a troubled bank on a Friday near the close of business,” Koontz says. He notes that the FDIC will have been doing plenty of work behind the scenes leading up to this day. “A Friday takeover allows the FDIC the weekend to work on the failed bank,” he continues. “The FDIC has several options for resolving a failed bank, including selling its assets and deposits to another institution, arranging a merger with a healthier bank, or creating a bridge bank to maintain banking operations until a suitable buyer is found.” 

Of course, as mentioned above, the FDIC also protects the failed bank’s customers—up to $250,000 per depositor, per insured bank, for each account ownership category—if needed. 

It’s also important to note that bank failures are very rare. Most of the time, banks are able to stay solvent. And if they’re FDIC-insured, the agency will examine and monitor them to ensure they comply with consumer protection laws.

How are consumers affected by bank failures?

If a bank fails, customers are at risk of losing unprotected funds. Funds may be unprotected if they’re held in a non-FDIC-insured institution, if they’re held in accounts that do not qualify for protection, or if the funds exceed the $250,000 limit. 

In the rare occurrence that an insured bank fails, the impact on customers will depend on the steps the FDIC takes in response.

“If a bank is acquired by another institution, customers’ accounts and services generally continue without interruption, and they become customers of the acquiring bank,” explains Koontz. 

In the case of a bridge bank, Koontz adds, customers can typically access their accounts and continue banking operations without significant disruption. “However, in some cases there may be temporary limitations on certain transactions or services until the resolution process is complete.”

How much does the FDIC insure?

The standard FDIC deposit insurance amount is up to $250,000 per depositor, per bank, for each account ownership category. That maximum applies to all the banks you have an account with, as long as the bank is an FDIC member. (Discover Bank is an FDIC member.) 

You can use the FDIC’s Electronic Deposit Insurance Estimator, or EDIE, to determine your total coverage across all of your accounts and banks.

Koontz says it’s possible the FDIC may organize an arrangement to reimburse funds beyond the $250,000 guarantee, but you should not expect funds above that number to be protected. There are steps you can take, however, to maximize your FDIC protection.

How can you maximize your FDIC protection?

If you’re looking to deposit more than $250,000—whether as an individual, a family, or a business—then the FDIC insurance limits may be a concern. Fortunately, there are some strategies you can use to increase the protection you receive. 

One option is to open multiple accounts with different ownership categories at the same bank. “The FDIC provides separate coverage for different ownership categories, such as individual accounts, joint accounts, retirement accounts, and certain trust accounts,” Koontz explains. “By utilizing these categories effectively, you can increase your overall coverage.” 

Another tactic is to open accounts at different banks, Koontz says. While it could be a little more inconvenient to manage accounts at different institutions, he notes that it’s wise to avoid keeping all your eggs in one basket.

“By distributing your deposits among different [insured] banks, you can ensure that each account remains within the coverage limit,” advises Koontz.

It’s also possible to increase your coverage by opening a revocable trust account and designating multiple beneficiaries. A revocable trust is an account that pays out to beneficiaries upon the death of the account holder. Consider consulting a tax advisor to discuss your specific situation.

As of April 1, 2024, the FDIC insures covered trusts up to $250,000 for each of up to five beneficiaries. That means a trust could be insured up to $1,250,000 for a single account holder. The covered amount for a joint trust, meanwhile, could be up to $2,500,000 for five beneficiaries.

Are you staying informed?

FDIC rules have changed multiple times since the program’s creation nearly a century ago. Koontz advises that you remain aware of any developments to be certain your deposits remain protected.

“It’s important to stay updated on any changes to FDIC coverage limits or regulations,” Koontz says. “Periodically review your deposit accounts and assess whether any adjustments are needed.” Again, that could include opening several different account types within one FDIC-insured institution or spreading out your accounts across several different FDIC-secured banks.

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Feeling confident about FDIC insurance?

Koontz’s insights into what the FDIC does and how it can assist you as a bank customer should help you gain confidence about opening an FDIC-insured bank account. That could include an online savings account, a cashback debit account, a certificate of deposit (CD), a money market account, an IRA savings account, or an IRA CD.

While FDIC rules apply to every insured account, everyone’s financial situation will differ. “It is always important to talk to your banker, financial advisor, or even the FDIC directly for more personal guidance,” explains Koontz.

The FDIC is there for your benefit. When you appreciate how it works, you can build up your financial foundation with peace of mind. Ready to get started? Open an FDIC-insured online savings account today.

¹ “Most U.S. bank failures have come in a few big waves.” Pew Research Center, Washington, D.C. (April 11, 2023) https://www.pewresearch.org/short-reads/2023/04/11/most-u-s-bank-failures-have-come-in-a-few-big-waves/ 

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The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.