Five Things Most People Don’t Understand About FDIC Deposit Insurance

Five things most people don’t understand about FDIC deposit insurance

Some retirees object to moving their cash from a low-interest-paying bank account or CD to another type of “safe money” instrument because there is no FDIC insurance on those financial vehicles. 

This common fear stems, in part, from the fact that many younger retirees had parents who grew up during the Great Depression and have told them horror stories about bank failures. Nearly 9,000 banks failed between the late 1920s and 1930s, and Americans lost deposits equivalent to $140 BILLION in today’s dollars.

Since its creation by Congress in 1933 and through its deposit insurance coverage created a year later, the Federal Deposit Insurance Corporation (FDIC) has gained Americans’ confidence and trust. Since that time, no depositor has lost a penny due to a bank failure.

Unfortunately, some retirees continue to cling to a handful of myths about the FDIC and deposit insurance that can mislead them into overstating its’ ability to protect all their savings and investments.

Here are a few of the most common myths about the FDIC and its deposit insurance.

1. The FDIC will keep your money safe from fraud.

Typically, if your bank account has been compromised through unapproved access, fraud, or theft, you are only responsible for the first $50 of unauthorized funds. But this is due to Federal regulations and NOT FDIC insurance.

2. If I keep all of my accounts in the bank, the FDIC protects me.

Some people refuse to move their retirement money from their bank’s investment office because they believe that FDIC insurance covers every dollar they have in the bank, regardless of the type of accounts. However, FDIC insurance only covers specific kinds of accounts, like checking and savings. It does not protect any investments or insurance purchased through the bank.

3. FDIC insurance covers mutual funds.

Many people favor investing in mutual funds because they promise higher rates of returns than things such as Certificates of Deposit. They often purchase these from a bank, thinking that the FDIC automatically protects them. However, funds invested in mutual funds are NOT deposits. The FDIC or other federal agencies do not insure them.

4. Treasury securities are protected by FDIC insurance.

Treasury securities, including T-bills, are not covered by deposit insurance. Redemption proceeds, interest, and principal from treasury securities are covered, however, when deposited into your bank account, up to the $250,000 limit.

5. Safe deposit boxes are insured by the FDIC.

FDIC deposit insurance offers no protection for money, and valuables kept in a safe deposit box. 

As you can see, FDIC insurance covers actual bank deposits and no other products a bank may offer its’ customers.

Other types of financial vehicles, such as annuities and life insurance, have their own unique protection protocols in place if the company fails. At the same time, the Securities Investor Protection Corporation (SIPC) provides coverage for securities investors.

If you are hesitant to move your money out of underperforming bank accounts because you fear losing FIDC protection, I suggest that you do a bit of research.

Learn more about the FDIC and SIPC and the different ways annuity and insurance companies work to protect their clients.

While bank and insurance company failures do happen, a tighter regulatory environment, along with a more educated consumer base, has made those failures a lot less likely.