If you're a depositor at an FDIC-insured bank, you've got a nice safety net of insurance to fall back on even if your bank goes under. You reap the benefits of insurance even though you haven't spent a penny on premiums. That's because banks pay the premiums for each depositor. These make up the FDIC's deposit insurance fund, which it dips into when it needs to pay back a depositor's loss.
The process goes like this: When a bank fails, the FDIC -- which keeps a close eye on how banks are doing -- swoops in to take charge of the bank in what's called a conservatorship. Although you won't get advance notice, you'll receive a letter in the mail about the closing after it happens. You may even read about it in the newspaper. If all goes well, the FDIC's takeover will go so smoothly that business carries on as usual.
That's because the FDIC is usually able to sell a bank pretty quickly. This entails finding another, healthy bank to assume the failed bank's business. The bank may shut down on Friday and open Monday after the takeover. During this time, you'll most likely still be able to use debit cards, checks and ATMs -- at least up to your insured limit [source: Bruce]. Direct deposits will automatically start routing to your account at the new bank. You should continue to repay bank loans as usual until further notice.
If the FDIC isn't able to find a bank willing to take over the failed one, however, things will go differently. The FDIC will send you a check in the mail for the loss up to the insured limit. Although this will get done as quickly as possible, you may not have access to funds during the interval, which can last a few days. Also, you'll eventually get instructions on what to do about your safety deposit box.
Now for the million-dollar question -- how much will you get back? The FDIC insures bank accounts up to $100,000 per depositor, per bank. So, if you share a joint account, you'll get half of it back up to the maximum of $100,000 for yourself. It may ease your mind to know that if you have under $100,000 in the failed bank, you'll get all of it back -- the FDIC has solid track record of never failing to return a penny of insured funds [source: FDIC]. This insurance covers savings, checking, money market and NOW accounts, as well as CDs. However, it doesn't cover such things as mutual funds, stocks, bonds or life-insurance policies.
If you have more than a hundred grand in the bank, you can take measures to insure all of it. One way to do this is to spread your funds across more than one bank -- just make sure they are owned by different institutions. You can even maximize how much you have insured at one bank by taking advantage of different ownership categories. For instance, IRAs are insured up to $250,000. But even if you didn't take the time to insure all of your bank funds, the FDIC goes the extra mile and tries to refund even uninsured funds. Although it can't always return all of your money, on average it returns 72 cents on the dollar [Bruce].
If you still have questions about what is or isn't insured, visit the FDIC estimator link on the next page.