Are Trust Accounts & Business Estate Accounts in Banks Insured by the FDIC?
In the United States, the Federal Deposit Insurance Corporation (FDIC) provides third-party insurance protection to the balance of certain deposit accounts and FDIC member banks and other FDIC member financial institutions. FDIC insurance protection is provided to individuals, businesses, estates and trusts. There are restrictions, however, on the total value of insured deposits.
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Function
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The FDIC is a United States government affiliated corporation charged with monitoring and ensuring the financial stability of the United States banking system. As an integral part of this charge, the FDIC provides insurance protection to qualifying demand deposits at banks and other financial institutions that are members of the FDIC. This insurance protection is designed to prevent depositors from rushing to withdrawal deposits at financially troubled institutions, thus exacerbating the financial troubles of the institution. Such a scenario is often known as a "bank run."
Features
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The FDIC does not insure the full amount of all balances at banks and financial institutions. The FDIC limits insurance to $250,000 per depositor per insured institution. Depositors with multiple accounts at the same institution are eligible for insurance protection on only the first $250,000 of aggregate deposits. Depositors with more than $250,000 in deposits may receive FDIC protection for their entire balances by spreading deposits amongst multiple insured institutions, provided that the deposits do not exceed $250,000 at any one institution.
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Qualifying Accounts
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While, the majority of deposit accounts typically associated with banks qualify for FDIC insurance protection, a number of more exotic investment instruments sold by some banks may not. Most savings accounts, checking accounts, certificates of deposit, and some types of retirement accounts are insured by the FDIC. Generally, stocks, bonds, mutual funds, annuities and life insurance policies do not qualify. Money market deposit accounts, a common alternative to savings account, may qualify if the underlying investments represent claims against the financial institution itself and not money market securities.
Deposit Insurance Fund
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The FDIC provides insurance protection through a Deposit Insurance Fund, or DIF. The Deposit Insurance Fund is a liquid reserve account held by the FDIC and funded through a fee levied upon the insured deposit balances of member banks. In the case of the failure of a bank or other financial institution, the FDIC typically becomes the receiver of the institution, settling the obligations of the institution and collecting assets owed to the institution. Insured amounts not covered through collected assets are typically repaid through the DIF.
Businesses, Estates and Trusts
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Businesses, estates and trusts are entitled to the same deposit insurance protection as individuals but, because they typically hold higher balance accounts, must generally be more aware of the $250,000 insurance limit. Even with insurance protection, a bank failure may result in the temporary inability to access bank deposits. For this reason as well, many entities prefer to hold deposits in at least two banks.
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