Is My Bank Insured?

Q: My bank got taken over, apparently because it was in trouble. The new bank assures me that my accounts are insured, so I can’t lose any money. How much of my money is insured? If I have different accounts, is each one separately insured? What happens if my bank fails?

A: Insurance protects deposits in banks, savings & loans, and credit unions. Right now, at least $250,000 of what you have deposited with a particular bank is insured. If you have different accounts in the same bank, held in different “legal categories of ownership,” each type of account is insured up to $250,000.

The main insurer is the Federal Deposit Insurance Corporation. The FDIC was created by the Glass-Steagall Act, which was passed after about 4,000 banks failed in 1933. Back then, before deposit insurance, you lost everything when your bank failed.

Now, the FDIC insurance protects you if your bank or savings and loan fails. Credit Unions are also insured, but by a different federal agency—the National Credit Union Administration. Deposits of all types, whether in a bank, S&L, or credit union, are now insured up to $250,000. That limit was increased from $100,000 on October 3, 2008, to calm fears about lost deposits. This temporary increase in the insurance limit continues to the end of 2009.

As the name suggests, deposit insurance insures DEPOSITS. That’s checking and saving accounts, money market accounts, and CDs. (Uncashed cashier’s checks are insured, too.) NOT deposits, and therefore not insured, are stocks, mutual funds, or the contents of a safe deposit box. (Those contents may be a “deposit,” and even money, but they’re not an account.)

The $250,000 of coverage applies to each “legal category of ownership”—or how accounts are held. An individual account, in one name only, is a different legal category from joint accounts with multiple names. Trust accounts—revocable and irrevocable—are another, different legal category of ownership.

So, if you have 20 different individual accounts at the same bank, they’re only insured up to $250,000. If you also have $250,000 in joint accounts, those joint accounts are insured, too.

Your share of ownership of a joint account—and therefore your insured amount—is not what you put into it, but simply the fraction determined by the number of owners. If two people are on the account, each owns one-half; if there’s 3, each owns one-third, and so on. A $1 million joint account with 4 owners is therefore fully insured, since each person gets $250,000 of coverage.

Different accounts of the same legal type at the same bank—even different branches—are combined to determine coverage limits. But deposits at completely different banks are separately insured. You can therefore have individual accounts totaling $250,000 at FifthFourth Bank, and another $250,000 in individual accounts at FourthFifth Bank, and be completely insured.

The FDIC says that it pays promptly, either by creating a new deposit for you in a new bank, or by just cutting you a check. (Three Illinois banks have failed so far in 2009, putting the FDIC on the hook for about $247 million to depositors.)

If your bank fails and you have more than $250,000 in an account, you may still recover some of the uninsured amount, depending on how much the bank assets the liquidators can recover and divide up.