I’ve been reading and hearing about some people that have pulled all their money out of their bank accounts and instead keep their cash at home. Some people stuff it under a mattress, some people put it in the freezer, some people bury it, and some people go the more traditional route of putting it in an at-home safe. Wherever people are putting their cash, the common factor is that they don’t believe their bank is a safe place to store their money.
I often wonder if these people realize that bank deposits are federally insured by the FDIC (Federal Deposit Insurance Corporation). What this means is that even if your bank goes bust and gets closed by the FDIC, you will not lose a dime of your money. Typically, you can even continue to write checks, make ATM withdrawals, and use your debit card without interruption during the closing process. Usually the failed bank simply gets purchased by a larger bank, but there are occasions where the FDIC simply pays out account holders their funds with a check.
How Much of My Money is Insured?
Generally speaking, the FDIC insures all deposits up to $250,000. Now, I don’t know about you, but I doubt that I will ever have anywhere near that much money deposited at any bank. Instead, I would have my cash invested elsewhere (stocks, bonds, real estate, etc.). Indeed, the vast majority of bank account holders are nowhere near this limit.
One item of note is the $250,000 limit is per person. As an example, let’s say that you’re married and that you and your spouse have $10,000 in a checking account, $20,000 in a savings account, and $300,000 in certificates of deposit. That adds up to $330,000, so a lot of people may think that if their bank goes bust they would lose $80,000. But if all those accounts are joint accounts (in both people’s name), your deposits are actually insured up to $500,000 (which is $250,000 x two account holders).
It gets even better if you have deposit accounts set up as trust accounts with designated beneficiaries. As an example, let’s say you’re in retirement and have a large portion of your retirement fund in conservative bank CD’s. Continuing our example, let’s say that you’re married and have two children. Your bank CD’s are jointly held by you and your spouse and titled in such a way that your two children are designated as trustees on the account. This scenario would entitle your accounts to be insured up to $1,000,000 (two account holders + two beneficiaries x $250,000). Setting up these type of accounts are a little bit more involved, so ask the folks at your local bank branch for assistance if this interests you.
Where Does the FDIC Get Its Insurance Funding?
When a bank goes under and the FDIC pays out account holders their insured deposits, many people incorrectly believe that the funds paid out by the FDIC are provided by our tax dollars. However, this is simply not the case. The reality is that every bank in the country receives a quarterly bill from the FDIC that goes into an insurance fund. The amount of this bill depends on how large the bank is (small banks pay smaller amounts, and large banks pay larger amounts).
However, the FDIC does have access to a line of credit from the Federal Reserve that serves as a funding source in a worst-case scenario. Any borrowing that takes place on this line of credit does have to be paid back with interest.
The Bottom Line
Deposit insurance has become very important to people since the economic downturn in 2008, yet many people still do not fully understand how it works. Rather than stuffing your cash under the mattress at home, your bank is still a rock-solid place to store your money as long as you fall within the FDIC insurance limits.