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At Telarray, we generally suggest not to hold large cash balances unless there are specific near-term cash needs. If you do have a lot of cash in your checking account for some reason, you should remember the benefits (and limitations) of Federal Deposit Insurance Corporation (FDIC) insurance. FDIC insurance protects your money in case something happens to the bank.

What Is FDIC Insurance?

The FDIC is an independent government agency that protects bank depositors from the loss of deposits at an FDIC-insured bank. This organization oversees FDIC deposit insurance, which protects bank customers in the event that an FDIC-insured institution fails. In other words, FDIC insures your money at the bank.

A bank failure is unlikely, but possible. In that case, the FDIC would provide depositors with an insurance payout up to the insurance limit, which in most cases is $250,000 per depositor, per institution, and per ownership category (more on that later). They might do this by offering depositors a new account of the same amount at an insured bank or by issuing a check for the insured amount to the depositor.

If you bank at an FDIC-insured institution, you don’t need to apply for FDIC insurance because coverage is automatic. 

A History of FDIC Insurance

Money stored at the bank wasn’t always protected with insurance. FDIC insurance was established in 1934 as a response to the bank failures depositors witnessed during the Great Depression.

Since then, there have been multiple instances of banks failing, and the FDIC has continuously protected insured deposits. For example, dozens of banks failed during the Great Recession, and four banks failed in 2020 alone. While it’s unlikely to happen, banks do fail, which is why it’s important to make sure your deposits are insured.

What Does FDIC Insurance Protect?

Now, for the most important question: What does FDIC insurance protect? First, FDIC insurance covers traditional deposit accounts of up to $250,000 per depositor, per institution, and per ownership category. These traditional deposit accounts include the following:

  • Checking accounts
  • Savings accounts
  • Money market deposit accounts
  • Certificates of deposit (CDs)
  • Prepaid cards (assuming all FDIC requirements are met)

What Does FDIC Insurance Not Protect?

Now that you understand what FDIC insurance does cover, let’s also look at what it doesn’t cover.5 The FDIC does not cover:

  • Stocks
  • Bonds
  • Mutual funds
  • Life insurance policies
  • Municipal securities
  • Safety deposit boxes or their contents
  • US Treasury bills, bonds, or notes

Your investments in mutual funds and ETFs at Telarray are custodied at Schwab are separate and not part of a bank at all. If you have large cash balances at Telarray, they’ll probably be invested in brokered money market funds (such as SNSXX) or very short term bond funds (such as MINT). These are actual funds that exist for the benefits of investors- they are not subject to the fortunes of Schwab (or the issuer of the fund, or Telarray, for that matter). While funds such as these can potentially lose money and don’t benefit from FDIC insurance, they are a type an investment trust and not at risk if Schwab itself went bankrupt as your custodian (which is the spirit of what FDIC insurance tries to protect against anyway).

How to Maximize Your FDIC Insurance

As we mentioned above, the FDIC insures up to $250,000 for a single or joint account per depositor, per institution, per ownership category. This means that a person can have one account or multiple accounts at the same bank, but only $250,000 is insured. 

There are multiple strategies to make sure your bank account balances are covered. The most simple is to open accounts at multiple banks and not allow any of them to exceed $250,000. 

Often investors’ eyes get big when we ask if they’ve considered FDIC limits when they discuss big checking account balances for big purchases or upcoming expenses. It’s very unlikely a large, well regarded US bank will fail, but FDIC insurance is free and it’s never a bad idea to make sure you are fully insured by spreading out your cash as necessary. In our opinion, a little inconvenience is worth it for the peace of mind!

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