First Published: January 23, 2022
Updated: November 2, 2023
There is insurance coverage for any anything valuable. These insurance policies are classified in to different types, and all these types of insurance that can cover anything valuable. This article covers bank insurance.
What Is Bank Insurance?
Bank insurance is a guarantee by the Federal Deposit Insurance
Corporation (FDIC) of deposits in a bank. Bank insurance helps protect
individuals who deposit their savings in banks against deposit money banks (DMBs) insolvency. In Nigeria, each depositor is insured up to N500,000 per bank. NDIC
maximum coverage limits are N500,000 per depositor
in commercial, merchant, and non-interest banks, primary mortgage banks, and
mobile money operator, and N200,000 per depositor in microfinance banks. While
in USA, each depositor is insured to at least $250,000 per bank.
Bank Insurance Functions
The FDIC is an independent agency of government of a country. FDIC which may have different nomenclatures in different economies, insures states, national and regional deposit-taking banks and institutions operating within the economy.
In Nigeria, the Nigeria Deposits Insurance Corporation (NDIC), established in 15 June 1988, has the function to protect depositors and guarantee the settlement of insured funds when a deposit-taking institution can no longer repay their deposits, thereby helping to maintain financial system stability. NDIC provides safety net for depositors in the banking system especially the newly established banks. The Assets Management Corporation of Nigeria (AMCON), an arm of the NDIC takes over operations, management and assets of insured banks when the banks are unable to repay deposits or any other form of their indebtedness to the public and other institutions. This is also aimed at protecting depositors` funds. NDIC says over 97% of depositors at deposit money banks(DMBs) in Nigeria would be completely protected by N500,000 Maximum InsuredLimits.
You can only benefit from NDIC deposit insurance coverage, if your
chosen financial product is a deposit product and if your bank
is NDIC-insured. If your insured bank fails, NDIC insurance will cover
your deposit accounts, naira for naira up to the insurance limit, including
principal and any accrued interest through the date of the insured bank’s
closing.
NDIC coverage is automatic whenever a deposit account is opened at
an NDIC-insured bank or financial institution. If you want NDIC deposit
insurance coverage, all you have to do is place your funds in a deposit product
at the bank.
In the US, FDIC was initiated under the Glass-Steagall Act of
1933 with the mandate of insuring bank deposits against loss and to regulate
banking practices. The collapse of a great majority of banks in the United
States during the Great Depression prompted the creation of the FDIC.
You can only benefit from FDIC deposit insurance coverage, if your
chosen financial product is a deposit product and if your bank
is FDIC-insured. If your insured bank fails, FDIC insurance will cover
your deposit accounts, dollar for dollar up to the insurance limit, including
principal and any accrued interest through the date of the insured bank’s
closing.
FDIC coverage is automatic whenever a deposit account is opened at
an FDIC-insured bank or financial institution. If you want FDIC deposit
insurance coverage, all you have to do is place your funds in a deposit product
at the bank.
Generally, a bank fails if it is unable to meet its obligations to
depositors and others. If a bank fails, the FDIC responds in two
capacities. First, as the insurer of the bank's deposits, the FDIC pays
insurance to the depositors up to the insurance limit. Second, the FDIC, as the
"receiver" of the failed bank, assumes the task of selling/collecting
the assets of the failed bank and settling its debts, including claims for
deposits in excess of the insured limit.
Functions of insurance contract on
banking operations can be summerised as follows:
· Covers depositors from total loss of their
deposits in the case of bank collapse
· Builds depositors confidence in the banking
system. Insured banks are more trusted than uninsured banks.
· Confidence of the public depositors enables banks to mobilize funds from the public and make same available to businesses for economic activities. Deposit banks depend on the customers deposits for their operations
Bank Insurance Coverage Includes
- Checking accounts
- Negotiable Order of Withdrawal (NOW) accounts
- Savings accounts
- Money market deposit accounts (MMDAs)
- Time deposits such as certificates of deposit (CDs)
- Cashier's checks, money orders, and other official items
issued by a bank
Bank Insurance Coverage Does Not Include
- Stock investments
- Bond investments
- Mutual funds
- Life insurance policies
- Annuities
- Municipal securities
- Safe deposit boxes or their contents
- U.S. Treasury bills, bonds, or notes
How Bank Insurance Limits Works
The limits of FDIC insurance is one of the most misunderstood forms of
financial guarantee in the US, even amongst banking personnel. The short answer
is always "FDIC insurance is limited to $250,000 per person, but this is
not accurate.
Each person can avail themselves of $250,000 of insurance per banking
category, as outlined by the FDIC. Those categories include individual
accounts, joint accounts, assets held for others in pay on death accounts,
certain types of retirement savings accounts, and several others. A single
person, with assets spread over a number of qualified accounts, could
theoretically have $500,000, $750,000, or even $1 million insured in bank
deposits.