What Is FDIC Pass-Through Insurance

Adam Rust

FDIC “pass-through” deposit insurance is deposit insurance that covers the interests of consumers who have funds held in common accounts. It most often applies to funds held in custodial accounts or qualified fiduciary accounts.

Other examples of accounts that utilize pass-through insurance include some pension and profit-sharing plans.

In most cases, deposits held in prepaid debit card accounts receive FDIC pass-through insurance.

For a company to put funds in an account with pass-through insurance, the entity must specifically record the interests of individuals on those funds. The claim of each individual to coverage is consistent with the portion of that individual’s funds as a fraction of all the deposits held in the larger pass-through account.

An example of such a policy is here:

Pass-through insurance does not cover assets held in investment vehicles and would not cover investors who hold securities, even for commonly-held products such as mutual funds.

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Most consumers will not perceive a difference between the regular “single account” FDIC insurance and the pass-through version. In both cases, if the bank holding the funds became insolvent, the account holder would be protected against losses on the first $250,000 in deposit balances.

An important caveat is that the single account coverage limit is set not for each account but for the total sum of deposits held in the name of a single person inside a single bank. Thus, if you have four checking accounts at the same bank and a total of $410,000 in deposits across those four accounts, then $160,000 of your deposits are uninsured. The obvious fix is to keep no more than $250,000 in deposits at any one bank.

As I mentioned earlier, the industry standard among bank issuers of prepaid debit cards is to pool consumer deposits in a common account. Doing so provides certain regulatory benefits for the bank, but makes no real difference to most consumers. Account holders still benefit from deposit insurance.

Funds held in gift cards have may receive FDIC insurance, but not necessarily so. If they do, they would have pass-through coverage as the names of the individuals with a claim on the balances is probably unknown.

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