FDIC Insured Account Definition, Requirements, Pros/Cons

What Is an FDIC Insured Account?

An FDIC insured account is a bank or thrift account covered by the Federal Deposit Insurance Corporation (FDIC), an independent federal agency responsible for safeguarding customer deposits in the event of bank failures. The maximum insurable amount in a qualified account is $250,000 per depositor, per FDIC-insured bank and per ownership category.

Understanding an FDIC Insured Account

An FDIC insured account means if you have up to $250,000 in a bank account and the bank fails, the FDIC reimburses any losses you suffered. For individuals, any sum that exceeds $250,000 for a single account type (e.g., individual, joint, etc.) may need to be spread among multiple FDIC-insured banks.

To understand how, and why, the FDIC functions, it is critical to understand how the modern savings and loan system works. Modern bank accounts are not like safe deposit boxes; depositor money does not go into an individualized vault drawer to wait idly until future withdrawal. Instead, banks funnel money from depositor accounts to make new loans in order to generate revenue from the interest.

The federal government requires most banks to keep only 10% of all deposits on hand, meaning the other 90% can be used to make loans. In other words, if you made a $1,000 bank deposit, your bank can actually take $900 from that deposit and use it to finance a car loan or a home mortgage.

This kind of banking is called "fractional reserve banking," since only a small fraction of the total deposits are kept as reserves at the bank. Fractional reserve banking creates extra liquidity in the capital markets and helps keep interest rates low, but it can also create an unstable banking environment.

It is possible the bank's customers could simultaneously request more than 10% of their money back at any one time. When too many depositors ask for their money back, a so-called "bank run," the bank must turn away some customers empty-handed. Other depositors might lose confidence and ask for their money back too, fearing they will not be able to recoup their savings. Often this can create a contagion-like effect that spreads to other banks, triggering systemic bank panics.

FDIC Insured Account Requirements

If an FDIC-insured bank cannot meet deposit obligations, the FDIC steps in and pays insurance to depositors on their accounts. Once declared "failed," the bank itself is assumed by the FDIC, which sells the bank's assets and pays off any debts owed. When a bank fails, account holders get their funds back almost immediately, up to the insured amount. If their deposits exceed that limit, they will have to wait until the FDIC sells off the bank's assets to recoup any excess.

A qualified account has to be held in a bank that is a participant in the FDIC program. Participating banks are required to display an official sign at each teller window or station where deposits are regularly received. Depositors can verify whether a bank is an FDIC member through a search at FDIC.gov.

Basically, all demand-deposit accounts that become general obligations of the bank are covered by the FDIC. The type of accounts that can be FDIC-insured include negotiable orders of withdrawal (NOW), checking, savings, and money market deposit accounts, in addition to certificates of deposit (CDs). Credit union accounts may also be insured for up to $250,000 if the credit union is a member of the National Credit Union Administration (NCUA).

Accounts that do not qualify for FDIC coverage include safe deposit boxes, investment accounts (containing stocks, bonds, etc.), mutual funds, and life insurance policies. Individual retirement accounts (IRAs) are insured up to $250,000, as are revocable trust accounts, although coverage on a revocable trust extends to each eligible beneficiary.

Examples of FDIC Insured Accounts

FDIC guarantees deposits up to $250,000 per account per person. For joint accounts, each co-owner receives the full $250,000 of protection. Along with the many other benefits of a joint account, a couple or partners with a joint account with $500,000 on deposit would be fully protected.

Multiple accounts held in the same bank under the same account holder's name are added together for purposes of determining the amount of insured deposits, so a person with two accounts at the same bank totaling $300,000 would have $50,000 unprotected.

However, deposit limits are separate for each different bank, even for the same owner. Say someone has $200,000 at Bank A and an additional $150,000 at Bank B. Even though their total deposits exceed $250,000, they are considered fully covered as long as both banks are FDIC-insured. 

If this individual transfers the $150,000 to Bank A, they lose coverage on $100,000 since their total deposit at Bank A is now $350,000. Such insurance over deposits benefits savers in that they need only worry about finding the best interest rate on a savings account rather than whether their money is safe.

History of FDIC Insured Accounts

The FDIC was created as part of the Banking Act of 1933 after a four-year period that saw nearly 10,000 U.S. banks fail or suspend operations. Most of these closures resulted from a run on the bank; banks did not possess enough money in their vaults to meet depositors' withdrawal demands, so they had to close their doors, leaving many families without their savings.

The purpose of the FDIC was to restore the faith of panicked Americans following the Stock Market Crash of 1929 and the onset of the Great Depression. Conceptually, the FDIC serves as a bulwark against future banking panics. The FDIC "insures," or guarantees, the value of all bank demand deposits up to a certain amount, with the total figure covered steadily growing since its inception.

Prior to 2006, the FDIC financed itself through the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). These were basically composed of insurance premiums the FDIC charged to member banks for housing and safekeeping their funds.

In 2005, President George W. Bush signed the Federal Deposit Insurance Reform Act to merge the competing funds. Since then, all premiums are left in the Deposit Insurance Fund (DIF), from which all FDIC-insured deposits are covered.

Special Considerations

The FDIC reserve fund has never been fully funded; in fact, the FDIC is normally short of its total insurance exposure by more than 99%. Congress granted the FDIC the power to borrow up to $500 billion from the Department of the Treasury, making the system effectively backed by the Federal Reserve. In other words, if the FDIC exhausts its other options, the government will step in to provide further financial backing.

The FDIC can also borrow money from the Treasury in the form of short-term loans. This occurred during the savings and loan (S&L) crisis in 1991, when the FDIC was forced to borrow several billion dollars to cover the failing thrifts' accounts.

Advantages and Disadvantages of FDIC Insured Accounts

According to the FDIC, no depositor has lost a cent of insured funds as a result of bank failure since its insurance debuted on Jan. 1, 1934. Measured on the merits of preventing bank panics, the FDIC has been a resounding success—the U.S. economy has not suffered a legitimate banking panic in the 80-plus years of the FDIC.

The FDIC isn't loved by everyone though. Detractors believe forced deposit insurance creates moral hazard in the banking system and encourages depositors and banks to engage in riskier behavior. They argue that customers do not need to care which bank makes safer loans if the FDIC is going to bail them all out anyway.

The Bottom Line

Bank failures, although somewhat uncommon, still happen. From 2001 to 2022, 561 banks failed, with four failing at the onset of the pandemic back in 2020. An FDIC insured account offers the peace of mind that your deposited funds will be safe should the worst happen to your bank of choice.