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What is Deposit Insurance and Why Should You Never Open an Account Without It?

By on February 27, 2014 in Money

What is Deposit Insurance and Why Should You Never Open an Account Without It?Deposit insurance is one of the most critical things you need to know about when it comes to your day to day banking. Having this type of insurance is something that you probably never think about, but going without it is one of the largest financial risks you can take with your daily banking.

Not sure what deposit insurance is and if your financial institution has it? Here’s an explanation of what this coverage is, why you need it, and how to find out if you have it.

Why Do I Need Deposit Insurance?

When you deposit your paycheck at your local bank or credit union you probably don’t think twice as to whether the money will be available for you to withdraw the next day. We have so many things to worry about in modern life that the potential failure of our bank doesn’t normally cross our minds.

But what if your bank fails? If you had $10,000 sitting in a bank today and it was closed by the government immediately, what would happen to your money? Would you be out of luck and have to start over? If that were the case you could easily face financial ruin with checks to your landlord or utility company bouncing, not to mention losing your life savings.

Thankfully, if you have deposit insurance on your financial deposits at a bank or credit union you don’t have to worry about what happens to your money during a failure of the financial institution. The regulatory authority over that financial institution steps in (usually on a Friday after closing) and shuts down the bank while insuring everything runs smoothly on Monday so customers can access their funds.

Without this insurance is a bank went under you would join a long list of creditors and potentially see little of your money returned to you even after the bank was liquidated.

What is Deposit Insurance?

Now that you know how important deposit insurance is, let’s define exactly what it is.

In short, deposit insurance keeps you from losing money when your bank or credit union goes out of business.

Luckily, this isn’t something that you pay for out of pocket. The bank or credit union pays into the deposit coverage in order to attract customers.

There are two main insurance providers: the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA). The former is for banks, the latter for credit unions.

Both the FDIC and NCUA provide deposit insurance to their respective financial institutions of up to $250,000 per deposit holder. If you have $250,000 or less deposited with the bank or credit union in total (regardless of the number of accounts; so add up all of your accounts at the financial institution) then if that bank or credit union fails you will be guaranteed to get your funds back.

If you have more than $250,000 deposited at the financial institution only the first $250,000 is guaranteed under FDIC and NCUA coverage, after that you will have to wait to see if there is enough money left at the end of the day to get the rest of your money back.

How to Find Out If Your Bank or Credit Union Has Deposit Insurance

You should never bank with a financial institution that does not have either FDIC or NCUA coverage. To do otherwise is taking on unnecessary risk with your money; a risk that you cannot control because you do not control what the bank does with your deposits in terms of lending and generating a profit.

Finding out if your bank or credit union has FDIC or NCUA coverage is extremely easy: it should be shown on the website and inside the physical branches you visit. You should see some form of notification that says “FDIC Insured”, “Member FDIC”, or “NCUA Member”. You can always ask someone at the branch if they are insured under FDIC or NCUA as well.

Going without deposit insurance is incredibly risky. You have to ask yourself why this financial institution wouldn’t have deposit insurance. 100% of the banks and credit unions you want to do business with will have it, so don’t open an account without it.

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