What Is Deposit Insurance?

What Is Deposit Insurance?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Deposit insurance is a type of insurance provided mainly by government institutions to depositors in banks. It’s designed to protect depositors against the risk of a bank’s potential failure or insolvency. If a bank goes insolvent, depositors still receive their funds up to an insured limit. This limit varies from country to country.

By providing a safety net for depositors, deposit insurance helps enhance the stability and confidence in the banking system, encouraging more individuals and businesses to deposit their money in banks.

Related Questions

1. How much money does deposit insurance cover?

The coverage limit for deposit insurance varies by country. For example, in the United States, the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per depositor, per FDIC-insured bank, for each account ownership category.

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2. Are all types of accounts covered by deposit insurance?

Deposit insurance typically covers various types of deposit accounts including checking accounts, savings accounts, certificates of deposit (CDs), and money market deposit accounts. However, financial products like mutual funds, stocks, bonds, and other investment products are not insured, even if they are purchased from an insured bank.

3. What happens if my bank fails?

If an FDIC-insured bank fails, the FDIC will either find another bank to take over or will issue checks directly to depositors for their insured balances. It’s important to note that since the start of FDIC insurance in 1934, no depositor has lost a penny of FDIC-insured funds.

4. Can I increase my deposit insurance coverage?

Yes, you can increase your coverage by having deposit accounts in different ownership categories (like individual, joint, and retirement accounts), because the FDIC insures deposits according to the ownership category. Additionally, you can also spread your money across different FDIC-insured banks.

5. What is a bank’s role in deposit insurance?

Banks pay premiums to the deposit insurance fund to provide this cover. It’s the bank’s responsibility to apply the deposit insurance rules correctly and provide accurate deposit insurance information to their customers.