People know when their money is in a bank’s savings or checking account; it is safe. These funds are insured by the Federal Deposit Insurance Corporation (FDIC). This organization was started in 1933 in response to the stock market crash of 1929. The goal of its creation was to make certain bank depositors are always able to get their money even in the face of a possible bank insolvency.
How the FDIC Works
According to Investopedia, Insurance premiums are paid to the FDIC by member banks. The amount on hand has to be able to insure deposits of up to $250,000 per depositor for each insured bank. This amount includes both principal and accrued interest. A depositor can increase their safety by having an account in more than one member bank or by having more than one account in a single bank. The covered accounts include regular checking and savings accounts as well as Christmas clubs, time deposits and NOW accounts.
FDIC insurance coverage is calculated as part of a budget plan for each bank. It is not determined by the amount in each account. The coverage provided by the FDIC is applied to the total balances of all the accounts at a single bank. This applies to a single bank, its branches as well as its Internet division. A bank is responsible for this even if it has branches doing business using different names. Accounts are only insured separately when they are held by banks that are chartered separately.
What Happens When A Bank Fails
It is rare for a bank to become insolvent, but it does happen. According to the FDIC, when this does occur, the situation will be handled in one of two ways. The FDIC will pay insurance to depositors up to the designated insurance limit. This is usually done a few days after a bank has stopped operating. The FDIC could use the Purchase and Assumption method (P&A). This involves deposits being taken over by another bank. Each depositor is given a new account with another bank that is FDIC insured. These accounts will have the insured balance from the closed bank. Deposits greater than $250,000 will be attached to deposits established by a third party broker or trust documents. These accounts must be carefully reviewed to accurately determine the level of deposit insurance coverage they are eligible to receive. The FDIC may also sell all or just a portion of an insolvent bank’s assets.
There are certain financial products that are not covered by FDIC insurance. These are investment products such as life insurance policies, mutual funds, stock, bonds, annuities as well as the contents of a safe-deposit box and more.
Individuals who deposit their money into a bank do not have to apply for insurance coverage from the FDIC. Bankrate explains that an individual who deposits funds into an open account in an FDIC-insured bank is automatically covered. Should a person want to make certain their entire deposit amount is covered, they should not place more than the insurance limit into a single covered account. A person should know if a bank is FDIC insured. They can speak with a bank representative. There should also be a FDIC sign at the bank. It’s possible for a person to call the FDIC at 877-275-3342 to confirm if a bank is covered by the FDIC.