Before putting your hard earned cash in any deposit account, it is a good idea to consider whether or not the financial institution is covered by some sort insurance that guarantees that your money will not be lost to you if the institution should fail. There are organizations that cover banks and credit unions in the event of a failure, ensuring that you will have access to your money – even if the financial institution goes down. For most financial institutions, this means either FDIC insurance, or insurance obtained by members of the NCUA.
The Federal Deposit Insurance Corporation (FDIC) was created in 1933, during the Great Depression. This government agency was created in response to the fact that many people lost their life savings as banks failed during this trying economic time. According to the FDIC web site, it does not receive appropriations from Congress, but instead receives funding from the premiums that banks pay to be insured. The FDIC claims that no depositor has lost even one cent of insured funds as a result of bank failure.
On top of insuring depositor funds, the FDIC also serves as a regulator for some 4,900 banks, examining how they comply with consumer protection laws. It is worth noting that the FDIC is the primary regulator for banks that do not join the Federal Reserve System. For banks that are a part of the Federal Reserve System, the FDIC serves in a position of a backup supervisor, rather than the primary regulator.
Five Presidential appointees serve on the Board of Directors for the FDIC. These appointees have to be confirmed by the Senate, and no more than three board members can be from the same political party. There are six regional offices of the FDIC, and there are also temporary satellite offices.
FDIC insurance covers depositor accounts up to $250,000, per depositor, per institution, in each ownership category. This means that if you have two bank accounts at the same bank, each with $250,000, if the accounts are in the same ownership category, only one of those accounts is actually covered. If you are looking to have better coverage for your cash, you will need to strategize about what sort of accounts your money is in. Ownership categories include single accounts, joint accounts, certain retirement accounts (find out more about FDIC insured retirement accounts), revocable trust accounts. You can also consider putting some of your money at different banks in order to avoid the problem of exceeding the $250,000 coverage limit at one institution. You can use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) tool to help you determine which of your accounts are covered.
Realize, too, that some products offered at your bank may not be covered by FDIC insurance. Securities are not covered, and neither are safe deposit boxes, annuities and insurance products. Make sure you find out for sure which products are covered before you commit your money to an account.
Like the FDIC, the National Credit Union Administration (NCUA) is an independent federal agency. However, while the FDIC is concerned primarily with banks, the NCUA is the agency responsible for overseeing credit unions. The NCUA is overseen by three-person board. As with the FDIC, board members are Presidential appointees confirmed by the Senate. Only two board members can be from the same political party, with members serving staggered six year terms.
The NCUA was created in 1970. The agency oversees the National Credit Union Share Insurance Fund, which was also created in 1970. It is the NCUSIF that actually provides the funds for insuring depositor money at credit unions. In order to ensure that the NCUSIF has the capital needed to cover its obligations, 1985 saw the institution of a requirement for covered credit unions to deposit 1% of their shares in the fund. According to the NCUA web site, covered credit unions are only required to pay premiums when the NCUSIF drops below a 1.25% equity ratio.
Credit unions have some different membership requirements when it comes to those who can deposit money at these institutions, but overall coverage is quite similar to what you see at the FDIC. Credit unions can be chartered by states or the federal government. Federally chartered credit unions are automatically NCUA members, and insured. The per limit, per depositor in each ownership category is $250,000. The same restrictions apply to coverage of securities, insurance products and annuities that are seen with FDIC insurance. If you have large amounts of money, you will have to make a plan to ensure that you have adequate coverage to protect all of your accounts.
Is Your Institution Covered?
More than likely, your bank or credit union is covered by the FDIC or NCUA. However, this is not automatic. Some banks and credit unions decide not to get federal coverage for deposit accounts. In some cases, these institutions get private insurance meant to protect deposits. Some banks have private insurance coverage to cover safe deposit boxes, as well as theft, neither of which is covered by the FDIC. About 5% of state chartered credit unions are private insured against failure, rather than making use of NCUA deposit insurance.
Before you put your money in a financial institution, double check the measures taken to protect your deposits, and make sure they are in line with what you think are adequate measures for your protection. Also, make sure you understand the coverage rules, and create a strategy to ensure that as much of your money as possible is protected.