What does deposit insurance ensure for depositors?

Deposit insurance is a financial safety net designed to protect individuals who hold funds in banks and credit unions. Specifically, it ensures that depositors will not lose their money in the event that their financial institution becomes insolvent or bankrupt. In the United States, this insurance is typically provided by the Federal Deposit Insurance Corporation (FDIC) for banks and the National Credit Union Administration (NCUA) for credit unions, covering deposits up to a certain limit—$250,000 per depositor, per insured bank.

This protection is critical because it instills confidence in the banking system, encouraging people to keep their money in banks rather than hoarding cash at home. The insurance guarantees that, even if a bank fails, depositors will be reimbursed for their insured amounts, thus safeguarding their savings.

The other options do not accurately reflect the purpose of deposit insurance. For instance, while higher interest rates on savings may be appealing, they are not a benefit provided by deposit insurance. Similarly, automatic loan approval and investment returns are unrelated concepts; loan approvals depend on a borrower’s creditworthiness, and investment returns are a risk-based aspect of financial markets rather than a guarantee provided by deposit insurance.