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Understanding Deposit Insurance

| March 20, 2023

Last week we looked at the Silicon Valley Bank failure. Since then, worries about the health of the banking sector have only grown, leading many depositors to wonder if their deposits are truly secure. While we don’t know what the ultimate outcome of this current banking situation will be, we do know that it provides an opportunity to take control of things we can control. This is something we like to focus on whenever “crisis” or uncertainty emerges, just as we did when the markets hit significant turbulence in 2020 and again 2022. Today we’ll do the same, this time “taking control” of the security of our cash. We’ll do so by helping you understand the different types of deposit insurance – FDIC, NCUA, and SIPC.

We’ll start by saying this is just meant to be an introduction that should suffice for the needs of most individuals and families. That said, we encourage you to reach out to your bank or credit union if your situation is more complex and your needs greater, as there is a tremendous amount of creativity that can be employed by these professionals to help meet your most complex needs. We’ll also note that if you’re thinking, “Who cares? The government bailed out all the depositors well beyond the FDIC limits,” we think you should still take care to work within the prescribed boundaries. There is no guarantee that another depositor bailout will materialize when the need arises.

When most people think about FDIC (Federal Deposit Insurance Corp.) insurance, they naturally think of a $250,000 coverage limit on their bank deposits. While this is a great place to start, for those that need additional coverage there are easy (and perfectly legitimate) ways to multiply that amount, so that all of your savings are FDIC-protected. Let’s look at those now.


What about credit unions?

Credit unions, which are popular here in the PNW with the likes of BECU, are not covered by FDIC insurance. However, credit unions are instead covered by a parallel agency, the National Credit Union Administration (NCUA). The NCUA offers equivalent coverage levels as FDIC. As you read this piece today, you can essentially think of NCUA and FDIC interchangeably, while also knowing that using both a credit union and a bank is a very simple way to double your coverage. That last statement will make more sense in just a bit.


Getting back to those perfectly legitimate ways to multiply the $250,000 coverage limit, it’s critical to understand that this limit is:

  1. Per bank
  2. Per depositor
  3. Per ownership category

“Ownership category” classes include singly-held and joint account, different types of trust accounts, corporation and government account, and some benefit and retirement account. The chart below from the FDIC’s website does a nice job illustrating this:

Click on image to access full FDIC website

All this means that it is possible for a single person to receive coverage well above $250,000. How could you do this? Here are some simple examples:

  1. Per Bank – Have up to $250,000 in two separate savings accounts at two different banks, extending your coverage to $500,000. For that matter, have $250,000 at 20 banks and extend your coverage to $5 million. Of course, there’s the issue of keeping up with so many accounts, but we’ll leave that for you to consider.
  2. Per depositor and ownership category – If you have your savings account in your own name and a joint account you share with your spouse, your family will be covered up to $750,000. If your spouse then has their own individual savings account, you can bump that total coverage up to $1 million[1]. Single and joint accounts are different ownership categories, as shown in the first two lines of the chart above.

Note that you can combine #1 and #2 above and quickly multiply your FDIC insurance coverage well into the millions. Whether you want or need that much cash sitting around is another story, but the protection is there should that need also be present.

It’s important, as well, to realize that your checking and savings accounts (and other deposit accounts) do not receive separate coverage when they are owned by the same depositor. Instead, they are aggregated together and only the first $250,000 is covered.

Want to know exactly how much coverage you currently have? The FDIC has a handy online calculator that can help you determine this amount – FDIC Electronic Deposit Insurance Estimator (EDIE).


A word of caution

A recent Wall Street Journal article (“What is FDIC Insurance?”, March 13, 2023) pointed out an often-overlooked caveat in this mix. They note that you need to look beyond your bank’s brand name, especially if you have a high-yield savings account or CD. Here is the example they gave:

Many digital banks are actually brands of traditional banks. For instance, BrioDirect is the digital brand of Webster Bank, and UFB Direct is a brand of Axos Bank. While these digital banks carry FDIC insurance, if you have deposits in account at both the online brand and the bricks-and-mortar parent, they may be subject to the same $250,000 FDIC coverage limit. 

If you are unsure, you can check the name of FDIC-member bank for your account using the FDIC’s BankF­­ind tool.


What does FDIC insurance cover (and not cover?)

Here is a list of the most common account types covered by FDIC insurance at participating banks:

  • Checking
  • Savings
  • Money Market deposit accounts (not money market mutual funds)
  • Certificate of Deposit (except as noted below)

Here is a list of what is not covered, though these assets may be covered by a different kind of insurance, which we’ll get to in just a bit:

  • Stocks or bonds
  • Mutual funds (including money market mutual funds)
  • Life insurance
  • Annuities
  • Crypto assets
  • US Treasurys
  • Brokered CDs (purchased through brokers, which places them outside the purview of FDIC coverage)

Now for your investment accounts

With money market rates at places like Fidelity and Schwab now topping 4%, significant amounts of cash have flowed into these funds. Hard to argue with this, when money market rates at banks are still <1%. As you may have gleaned already, this does come with one significant trade-off. When the funds leave the bank, they also are often leaving behind FDIC insurance (at least the portion of the cash that’s within the FDIC limits). Are you, however, losing all protection on these assets? No! When assets are within an account at a qualified custodian such as Fidelity or Schwab, they are covered by SIPC (Securities Investor Protection Corporation). SIPC does not cover losses stemming from fluctuations in investment value, but does provide coverage on up to $500,000 per customer, per institution, including $250,000 maximum coverage for cash (money market funds are treated as securities, not cash, and thus receive the full $500,000 of coverage).

Note that the “per customer” rule of coverage with SIPC is based on ownership capacity. As NerdWallet points out, “If, for example, you have an IRA account in your name and a joint account with your spouse, the SIPC treats them as separate accounts and insures each up to $500,000. (Unlike with FDIC coverage, joint accounts aren’t insured to the full amount for each account holder with SIPC insurance). Other examples of separate capacity include accounts held for a trust or a corporation, by a guardian for a ward or minor or by an estate executor. A margin account is not considered a separate capacity.” This same concept extends to your Roth and Traditional IRA accounts. These are considered separate, and thus SIPC would protect up to $1 million ($500,000 per account).

To learn more about SIPC, please visit their website here.

Let’s wrap it up!

We hope this has provided a good glimpse into the ways you can help protect your savings, whether it is at a bank, credit union, and/or brokerage firm. As noted earlier, each of these topics is more complex than this piece is designed to dig into, and so we encourage you to reach out to your professionals at these respective firms to learn more and design a protection plan that best suits your needs, should the need exist.

[1] Note that account ownership can be an integral part of effective estate planning, so be sure to consult with your attorney before rushing out to spread your cash across multiple ownership categories.