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FDIC Consumer News - Summer 2017

Dear FDIC: More Answers to Consumer Questions About Deposit Insurance

En Español

I have a prepaid account that I understand could be FDIC-insured. What do I need to know?

Many consumers are choosing to make purchases at stores, withdraw cash from ATMs and pay everyday bills online by tapping into money they’ve deposited in prepaid accounts at banks or other companies. The transaction typically involves using a card similar to a debit card except that the cash value typically is not linked to a checking or savings account. Accountholders can also access a prepaid account online or by using an app in conjunction with a smart phone.

Many consumers ask the FDIC if the funds they used to establish a prepaid account are insured by the FDIC. “The most important thing to remember is that FDIC deposit insurance coverage is based on actual ownership of the funds. And, of course, deposit insurance coverage only applies when a bank fails,” said Martin Becker, chief of the FDIC’s Deposit Insurance Section.

“To assure your ownership of the funds in the event of a bank failure, you must register your prepaid card according to the instructions provided by the card issuer,” he added. “Deposit insurance coverage does not apply if your prepaid card is lost or if someone gains access to your prepaid card or your account and steals the funds. In these situations, other legal options may be available for you to pursue the recovery of your funds as described in your account agreement and as may be provided by state or federal law.”

As the cardholder, you are responsible for registering your card. In addition, the card issuer must comply with certain requirements in order for your funds to be eligible for FDIC deposit insurance coverage. First, the account must be appropriately titled in the bank records and indicate that the prepaid account provider is going to be acting as the cardholder’s agent, which could include duties such as transferring funds on your behalf when you make a purchase and keeping track of the balance on your prepaid card as you add or withdraw funds. Second, if the bank fails, the card issuer as your agent will need to provide the FDIC a list of each cardholder’s identity and the amount you have on your card at the time the bank failed. Third, the contractual agreement among the financial institution, the prepaid card issuer and the cardholders must indicate that the individual cardholders are the owners of the funds.

Some prepaid accounts are set up directly by FDIC-insured banks. As with any account set up directly with a bank, your funds will automatically be insured up to the $250,000 if your bank fails.

For more information, see the FDIC's new webpage on prepaid accounts.

I have already paid for my burial expenses and signed a funeral service contract with the funeral home, which deposited the money into a bank account for these purposes. If the bank fails, do I get the money back or does the funeral home? Either way, what do I need to know to be fully protected?

“In looking at the deposit insurance coverage of money to be paid in advance of entering into a contract with a funeral home, the first question to answer is, ‘Am I retaining ownership of the funds?’” said FDIC Senior Consumer Affairs Specialist Calvin Troup. “That’s because FDIC deposit insurance coverage depends on the actual ownership of the funds based on the relationship between the parties under the terms of the contract, applicable state law and the deposit account records of the insured depository institution.”

Let's explore some common options:

“Before entering into an agreement with the funeral home, you may wish to seek an opinion from your lawyer to determine who will be the owner of the funds under the terms of the contract,” Troup said. “Generally, the owner of an account is the person or entity responsible for reporting the interest in tax returns, assuming that the account is an interest-bearing account.

“Either before or after you sign a contract with a funeral home, the FDIC can help you determine the applicable FDIC deposit insurance coverage,” he added. “Please call us so we can discuss your coverage.”

You can learn more about FDIC deposit insurance coverage by calling us at 1-877-ASK-FDIC (1-877-275-3342) or visiting Understanding Deposit Insurance. For those who are deaf or hard-of-hearing, please call 1-800-925-4618.