Final answer:
Overdraft protection is a service that links your checking account to a backup funding source to cover transactions if you overdraw, which may involve a fee. Overdraft coverage is a bank's policy on whether to allow overdrawn transactions and possibly charge an overdraft fee. Deposit insurance like the FDIC protects depositors from losing their money if the bank fails.
Step-by-step explanation:
The difference between overdraft protection and overdraft coverage lies in how banks handle transactions that exceed the account balance. Overdraft protection is a service that links your checking account to another account, such as a savings account or a line of credit, and funds are automatically transferred to cover transactions if you overdraw your account. This service may come with a fee, but it typically helps avoid the higher costs associated with overdraft fees. On the other hand, overdraft coverage refers to the bank's policy of allowing or not allowing transactions that exceed the account balance to go through. With overdraft coverage, the bank may choose to cover the transaction and charge an overdraft fee, or it may decline the transaction due to insufficient funds in the account.
In the realm of deposit insurance, to prevent issues such as bank runs, institutions like the Federal Deposit Insurance Corporation (FDIC) in the United States ensure that depositors do not lose their money even if the bank fails. This system of protection, supported by insurance premiums paid by banks based on their deposit levels and financial riskiness, provides a safety net for individual deposits up to a certain limit.