CDs are backed by FDIC or NCUA insurance

If the high annual percentage yields (APYs) of certificates of deposits (CDs) are tempting you to open an account, one thing that may be holding you back is concerns about security. With recent bank failures, many people are worried about the money in their bank accounts and whether they’re protected if their bank fails.

The answer is yes. Your deposits, up to a limit set by the government, are insured by the Federal Deposit Insurance Corporation (FDIC), an independent federal agency. You can take advantage of today’s high interest rates without worrying about the safety of your money.

How does FDIC insurance protect CDs?

When you open a CD, you deposit a lump sum into the account and commit to leaving it untouched for several months or even years. In exchange, banks typically pay you a higher rate of return than you’d get with a basic savings account.

CDs used to be an overlooked banking option, but the high rates you can find from many banks now have renewed enthusiasm for CDs. The best CDs have APYs of 5.00% or higher.

Any CD you open with an FDIC-insured bank — and most national, regional, and even digital banks are FDIC-insured — is backed by FDIC coverage, up to $250,000 per depositor. If your bank were to fail, your deposit is insured, so the government would guarantee you the balance of your account, up to $250,000.

Read more: What is the FDIC and how does it work?

If you have an account with a credit union, your deposits aren’t secured by the FDIC. However, your money is still safe! Your deposits are backed by the National Credit Union Association (NCUA) and the National Credit Union Share Insurance Fund (NCUSIF).

NCUA insurance and Credit Union share certificates

CDs are offered by banks. However, credit unions have similar products known as share certificates. With share certificates, you earn dividends rather than interest, and the dividend yield is written as a percentage like APY.

Share certificates function very much like CDs, so much so that customers won’t notice a difference between them. In fact, many credit unions refer to their share certificates as CDs to prevent confusion and describe the account dividend earnings as interest.

Rather than FDIC insurance, credit union share certificates or CDs are backed by up to $250,000 of coverage per depositor through the NCUA. Although the insurance is issued under the NCUSIF, it’s typically referred to as NCUA insurance.

As with FDIC coverage, NCUA insurance applies in the unlikely event that a credit union fails. However, no consumer has ever lost money from an account insured by the NCUSIF.

Read More: What is the NCUA and how does it work?

What happens to CDs if your bank fails?

If your bank or credit union fails, your account will be transferred to another federally insured institution. All of the money — up to the coverage limit — will be intact, so you won’t lose any money if the bank or credit union fails.

In cases where the bank or credit union isn’t absorbed by another institution, the FDIC or NCUA will write you a check for the amount you had in a qualifying account.

One recent example is Silicon Valley Bank, which closed in 2023. When it closed, the FDIC transferred all of the bank’s deposits to Silicon Valley Bridge Bank, a bank operated by the FDIC. Shortly thereafter, the FDIC entered into an agreement with First Citizens Bank & Trust Company; First Citizens Bank agreed to take over all of Silicon Valley Bank’s deposits and loans.

Those with deposit accounts at Silicon Valley Bank, including savings accounts or CDs, automatically became customers of First Citizens Bank. The deposits were assumed by First Citizens Bank, and qualifying accounts were backed by FDIC insurance.

Changes to CD terms

Although your deposit is safe thanks to FDIC or NCUA insurance, there is no guarantee that the new bank or credit union will honor the terms and rates of the existing CD. When the new institution takes over, it reviews existing accounts, and it may decide to adjust the rates on existing accounts; your CD agreement is not a binding contract in cases of bank or credit union failures.

The bank or credit union will notify you of the account changes, such as changes in CD APYs, in writing. Once you receive that notification, you can opt to withdraw funds from the CD without an early withdrawal penalty, or you can enter into a new CD agreement with the bank.

What happens to CDs if the market crashes?

CDs and share certificates are completely independent from the stock market. While the value of your stocks, bonds, or mutual funds may fluctuate, your money in a CD is secure, and the rate of interest is set by the terms of the CD.

In general, CDs have lower returns than the long-term returns of the stock market when measured over years, or even decades. Although some CDs are available with APYs of 5.00% or higher right now, the market’s long-term, historical average return is about 10%. For long-term goals such as retirement, your money is better off invested in the market so you can take advantage of the potential for higher growth.

But for shorter-term goals where you don’t have the time to handle market fluctuations, or those that are near or in retirement, a CD can be a risk-free tool to increase your savings. A CD often allows you to earn a higher rate of return than you’d get with a savings account, and it can provide some stability in times of market volatility.

What are the limits of FDIC or NCUA insurance on CDs?

Deposit insurance covers up to $250,000 per depositor, per insured bank, per ownership category. Owner categories include:

• Single accounts

• Joint accounts

• Certain retirement accounts

• Irrevocable trust accounts

• Employee benefit plan accounts

• Corporation, partnership, or unincorporated association accounts

• Government accounts limits

How does that work for you? Consider this example: In the case of CDs, you may have a single account and a joint account at one bank. If that’s the case, you’d have a total of $750,000 of coverage: $250,000 for the single account, $250,000 for your ownership stake of the joint account, and $250,000 for your partner’s stake in the joint CD.

You can use the FDIC deposit insurance calculator to find out how much of your deposits are covered.

Tips for maximizing FDIC or NCUA insurance benefits

Now that you know how FDIC and NCUA insurance works with CDs, you can develop a strategy for your deposits to maximize your protection. If you have a substantial amount of assets — meaning more than $250,000 that you want to deposit into a CD — these strategies will help you insure all of your deposits:

• Each adult can open their own account: The coverage rules apply per depositor per bank. If there are multiple adults in your household, such as a partner and adult child, each adult should open a CD in their own names. Each person would qualify for $250,000 of coverage.

• Open a joint account: Joint CDs are a different ownership category, so you can open an account with your spouse with the same bank and qualify for up to $500,000 of additional coverage.

• Open an account with another bank or credit union: If you reach the coverage limits of a single or joint CD with one financial institution, consider opening another account to deposit the remainder with another bank. Diversifying your deposits across multiple banks or credit unions will ensure all of your money is safe.

Review your finances once a year to ensure your deposits — plus earned interest — do not exceed NCUA or FDIC insurance limits. If your deposits surpass the coverage maximums, you may need to make adjustments or move accounts to a new bank or credit union to adequately protect your deposits.