Introduction
Deposit insurance is a type of coverage plan which protects a person’s bank deposits under all circumstances, which includes bank failures and bankruptcy. In United States, most deposit accounts are housed at credit unions and government banks. If the financial institution that holds the account of a depositor goes in bankruptcy or runs away, a part of insurance funds of the account holders are reimbursed. Thus, this policy prevents the depositors from losing all their finances.
History
The concept of deposit insurance in United States was first introduced in 1933 during the national banking crisis. Due to failure of financial institutions, American Congress had established a Federal Deposit Insurance Firm under the banking act in 1933. Additionally, a Temporary Federal Deposit Insurance Fund was created by the government the same year.
As a result of Great Depression in early 1930, countless banks were bankrupted. This made the authorities worried about economic stability of people, industries and institutions. Seeing the negative results of this economic crisis, the Federal Deposit Insurance Corporation was approved and formed by the Congress.
Working:
When a financial agency goes bankrupt and fails to return money to account holders, NCUA or FDIC takes over the functioning and charge of that institution’s assets. Authorities try to sell these assets to other financial firms, preferably a private one. Once this deal is finalized, all accounts are activated and deposit insurance funds are available for instant withdrawal. In case no buyers stand up for the deal then NCUA or FDIC begin insurance payouts within one day of the closing of that particular credit union or bank.
Features
Limits:
Both NCUA as well as FDIC impose certain restrictions on the deposit insurance funds. They can offer approximately $250,000 as deposits held by an individual depositor at any one of the member financial institutions. Besides, these funds shall individually cover deposits worth $250,000 per owner, held in the retirement accounts.
In case of beneficiary deposit insurance funds, both these authorities offer a coverage sum worth $250,000 to the beneficiaries of dead people.
Folks who wish to double the insurance sum held in their accounts can do so by incorporating POD beneficiaries. However you must note that although insurers will cover for business entities, they won’t offer extra coverage to insure the privileges of business account signers.
Considerations:
Although both NCUA and FDIC try to reimburse the money of their deposit insurance account holders, legally they’re not obliged to do so if they fail to raise sufficient funds by selling off the assets of bankrupted institution. Moreover some credit unions and banks are not federally insured because they purchase insurance protection from other guaranteed funds. Therefore, investors must be careful while investing their money in a particular firm.
Tips and comments
Deposit insurance offers benefits for both depositors as well as banks. While account holders have financial security and peace of mind, banks get lifetime protection. If financial institutions make too many poor investments, they can still prevent themselves from getting bankrupt because either FDIC or NCUA will take charge and put them under a fresh order. Thus, this type of insurance guarantees the rights of all!
