Some Common Misperceptions About FDIC Insurance

I speak with lots of people from many walks of life about the US banking system, about the safety of banks and deposit protection.  

Virtually everyone is generally familiar with FDIC insurance. Federal Deposit Insurance Corp. (FDIC), of course, is an independent agency of the U.S. government that protects depositors against loss of their deposits if their bank or thrift institution fails. The FDIC is backed by the full faith and credit of the U.S. government. All federal credit unions and most state-chartered credit unions are covered by the National Credit Union Share Insurance Fund (NCUSIF) which is operated and managed by the NCUA and operates very similarly.

In spite of the familiarity with the FDIC, there are some very common misperceptions.  Let me address these here.

1. The most dangerous misperceptions is that FDIC insurance covers all types of financial institutions and products. FDIC insurance only covers bank deposits such as savings accounts, checking accounts, and certificates of deposit (CDs). To be clear, it does not cover investments like stocks, bonds, or mutual funds whatsoever.  It also does not cover insurance policies, annuities, or other financial products that may be sold be a bank, even if the underlying policy is issued by that bank or some other FDIC-insured bank. When you purchase a bank's stock in any online broker, your investment is not covered by either that bank's FDIC insurance or the broker's SIPC insurance.

2. Another misperceptions is that FDIC insurance provides unlimited coverage for deposits. In reality, the standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. There was some confusion that arose in 2023 as a result of the full bailout of depositors in Silicon Valley Bank and Signature Bank and subsequent comments made by Treasury officials that still causes many to believe that FDIC insurance is unlimited.   Unless and until there is an act of Congress raising the limit above $250,000 per ownership category, the limit remains at $250,000.

3.  When the FDIC and NCUA refer to insurance to $250,000 in each ownership category, some depositors misunderstand what an ownership category is.  As explained here, "ownership categories" are individual accounts, joint accounts, retirement accounts, trust accounts, etc. and each of those categories may be separately insured up to the limit.  "Ownership categories" does not refer to number of accounts or types of products. If an individual has a $200,000 savings account, a $200,000 checking account and a $200,000 CD, he or she is well in excess of the $250,000 limit.   If a couple has those same three products entirely in joint accounts, they are still in excess of their $500,000 limit.

4. All Institutions offering savings and CD products are not insured by the FDIC.  Wealthfront, Betterment, Robinhood and Raisin are not FDIC insured banks, even though these banks may be opening accounts in your name at FDIC institutions.  The outfits fishing on Facebook, Twitter and elsehwere are not FDIC insured banks and probably are not opening accounts in your name at FDIC institutions.  It is essential to verify whether a bank is FDIC-insured before depositing funds. 

6. If you suffer losses from fraud, theft, or unauthorized transactions, you are not covered under FDIC (or NCUA) insurance which only covers the event of a bank failure. These issues may covered by the banks own policies or by state or federal consumer protection laws.

7. Some individuals mistakenly believe that FDIC insurance covers their deposits in foreign banks or deposits in foreign currencies. FDIC insurance only applies to deposits held in banks within the United States and its territories.  While it would apply to a foreign currency account at, say, Everbank, it does not protect the depositor from losses due to foreign currency fluctuations.

It is crucial for individuals to understand the specific coverage and limits provided by FDIC and NCUA insurance and to always err on the side of caution when not sure.