A certificate of deposit or CD is considered a risk-free investment method. Here’s how they work: the investor agrees to deposit a specific sum of money into a financial institution, typically a bank or credit institution, and leave that money there for a fixed amount of time. CDs generally last anywhere from three months to six years. The investor agrees not to withdraw any money from the CD in return for a high interest rate from the bank. After that CD has reached maturity (the financial term for the expiry date), the bank repays the deposit plus the accrued interest.

Why are CDs considered risk-free? Because they are, in most cases, FDIC insured.

FDIC insurance is incredibly important to consider when choosing a CD. Although smaller financial institutions without FDIC insurance can and do offer higher interest rates on CDs, the investor has no recourse should the institution fail. The money will simply evaporate. Conversely, by investing in a CD with an institution that is FDIC insured, the investor can rest assured that their money is safe no matter what may happen. The FDIC will cover the balance of the CD fund up to $250,000, including both the principle and interest.

Investors should always be aware of the insurance limits offered by the FDIC. The $250,000 figure is the total sum for all funds held in the bank. Many people get into trouble by listening to unscrupulous brokers who claim that the FDIC will insure separate account as long as the principle sum in each does not exceed $250,000. For example, the investor could have $50,000 in one CD, $200,000 in a second, and $250,000 in a third and still be covered by the FDIC. This is simply not true. The FDIC only insures CDs for up to $250,000 total. Any funds over that number are not insured.