When investing money or putting it into a savings or checking account, you may wonder if you can trust that financial institution to keep your money safe. Today, most people do not think much about this because our banks and credit unions have a significant amount of economic strength. Yet, during the days of the Great Depression, that was not the case.
In 1929, at the onset of the Great Depression, so many people were pulling money out of their banks, in what’s called a run on the bank, that the bank did not have enough money to pay everyone. That meant some people could not withdraw the money they had placed into their accounts.
Today, the government has implemented financial tools to eliminate this risk. It’s called deposit insurance, and it is a fundamental concept for you to know if you are considering saving money or investing in any way.
What Is Deposit Insurance?
Deposit insurance guarantees that the money you put into the bank or credit union will be protected. That is, if you go to pull that money out of the account, you will be able to do so. If the bank were to run out of funds to meet the demands of its clients, the consumer would be protected by the federal government.
There are some restrictions and limitations on this, though. More so, not all banks and credit unions will carry this type of insurance. Don’t assume you are protected.
What Does It Cover?
Deposit insurance in the U.S. provides up to $250,000 per depositor, per insured bank, and for each account the person owns. That means a person who deposits money into an insured bank will be protected and guaranteed up to $250,000.
If an insured bank fails, which means it cannot meet its financial obligations, the associated deposit insurance provider will ensure that depositors can access their accounts. Often, the insurer has to liquidate the institution, which means it will write checks for all deposited funds for depositors. In other cases, the insurer could issue a deposit transfer, moving the funds from the failed bank to another.
The key to remember here is that your money is protected.
FDIC Insurance
The Federal Deposit Insurance Corporation (FDIC) is the primary agency that protects traditional banks. This is an independent federal agency, and it is not funded by taxpayer money. Instead, the member banks pay a fee to use the service. The FDIC insures deposits in member banks and thrifts.
The FDIC was first created in 1933 to boost confidence in the country’s banking system and encourage people to start using banks again. Today, the FDIC provides $250,000 of protection per depositor as long as the bank the depositor uses is an FDIC-insured bank.
Virtually all banks and thrifts are FDIC members, but it is worth ensuring that before assuming it is so. FDIC protections can cover most types of deposits, including savings and checking accounts, Certificates of Deposit, retirement accounts, trusts, and more.
Keep in mind that it covers only $250,000 of any account. Therefore, those with more than that may wish to have more than one account to gain complete protection on all deposits.
Also, note that there are some limitations on the types of accounts covered. Mutual funds, life insurance policies, stocks, annuities, and bonds do not have FDIC protections.
NCUA Insurance
The National Credit Union Administration (NCUA) provides virtually the same types of protections, specifically for credit unions. That means all member credit unions have federal insurance protection of up to $250,000 for their deposits into these accounts.
The NCUA is a federal agency that requires all federally chartered credit unions to carry this type of insurance. The coverage provides up to 250,000 for the same investments, including savings, checking, Certificate of Deposits, money market accounts, and other accounts. It does not cover mutual funds, stocks, bonds, life insurance, treasury securities, or annuities.
Why Does Deposit Insurance Matter?
As you consider where to put your money, you want to be sure it is in a safe and protected location. While it is unlikely that a run on the bank will occur today, there is always the risk that a bank could fail, making having FDIC or NCUA coverage a valuable tool to protect what you’ve worked hard to earn.