Have you ever wondered what the difference is between FDIC vs. SIPC insurance? In a nutshell, they both protect you from financial losses if your financial institution goes out of business and is unable to return your deposits.
FDIC covers banks and SIPC covers investment firms.
However, there’s more that you need to know about these two types of federally mandated (but not both government-owned) insurance corporations. They also have limits so it’s important to arrange your accounts so that you are fully protected.
Here’s a rundown of important information you’ll want to know about these two insurance institutions.
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What Is FDIC Insurance
The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that was established as a part of the 1933 Banking Act created to restore consumer confidence in the banking system.
Consumer confidence in banks had plummeted after the Great Depression. Many people had lost money stored in banks because of the bank failures caused by the Depression.
Wary of losing more money, people had returned to storing cash in coffee cans and under mattresses.
The government created the FDIC as a way to ensure citizens that banking in America was indeed safe. Insurance coverage provided by the FDIC covers consumer banking deposits in the event of a banking institution failure.
The FDIC isn’t funded by public funds from the government. Instead, it’s funded almost entirely by insurance dues paid for by banking institutions. However, the FDIC does have a $100 billion line of credit with the United States Treasury.
FDIC Coverage Terms
FDIC insurance doesn’t cover all bank deposit accounts. However, it does cover many. The coverage and terms for FDIC insurance are as follows.
FDIC insurance covers deposit bank accounts including:
- Checking accounts
- Savings accounts
- Money market accounts
- Certificates of Deposit (CDs)
- IRA CDs
Each bank account at an FDIC member bank is insured for up to $250,000 plus interest for each account owner. So, if you have a joint savings account with your spouse that holds $500,000, you will each be reimbursed $250,000 if that bank fails.
However, if you have a single owner account containing $500,000, you’ll only be reimbursed for $250,000 plus interest if the bank were to fail.
If you have a checking account and a savings account at an FDIC member institution, each account is insured for up to $250,000 plus interest, and that is the maximum reimbursement you can receive for each account.
It’s important to note that each different type of account is covered separately. For example, married couple Mark and Ann have a joint savings account with $400,000. Mark has an individual account with $150,000 and Ann has an individual account with $200,000.
Together they have $750,000 in savings but the entire amount is covered because of how they have it set up. Three accounts each with different ownerships.
What FDIC Does Not Cover
The FDIC does have some coverage exclusions. It does not cover balances over the limit for the type of account as described above.
Also, the FDIC does not protect any type of investment accounts such as stock funds, bond funds, money market mutual funds, or annuities against bank failure.
Those types of funds, however, may be covered by another type of insurance: SIPC insurance.
Here are some great checking accounts if you are looking to switch banks.
What Is SIPC Insurance
The Securities Investor Protection Corporation is a non-profit corporation that was created under the Securities Investor Protection Act of 1970.
The SIPC is a non-profit organization that is mandated by the government and funded by its member firms. So, any investment firm or institution that offers SIPC insurance helps fund the SIPC.
The goal of the SIPC is to insure funds lost by failed investment institutions. Note that this does not include coverage for failed investments; just funds lost by failed investment institutions.
For example, let’s say you use e*Trade to buy $1,000 in Home Depot stock and the stock price drops causing you to lose $100. Shortly afterward e*Trade goes out of business and can’t return your money. (e*Trade is a solid company, just using them as an example.)
SIPC Insurance would return $900 to you. The $100 in losses due to market fluctuation would not be covered, but the $900 you lost due to failure of the brokerage would be.
The SIPC is not a government agency, nor is it responsible for regulating investment firms. However, it is overseen by the government’s Securities and Exchange Commission (SEC).
SIPC Coverage Terms
The SIPC doesn’t cover all types of financial accounts. However, it can cover the following types of investment vehicles when the investment firm is an SIPC member:
- Mutual funds
- Money market mutual funds
Other types of investment accounts may be covered as well. Talk with your brokerage representative or with the SIPC for specific information on accounts you’re considering investments in.
SIPC insurance is meant to protect investors with SIPC-member firms from failures of institutions. You can be covered up to $500,000 per customer, per firm. Up to $250,000 can be in cash.
So, if you have money at an SIPC-insured investment firm that fails, and $500,000 of that money is in cash, you’ll only be reimbursed for $250,000 of the cash.
Money at other SIPC-insured institutions may also be covered up to $500,000.
SIPC coverage limits work similarly to how FDIC insurance works. Each different type of account is insured separately. This is important to know since it’s very possible an average person could hit SIPC limits during their life.
Take our married couple, Mark and Ann from before. Let’s say Mark has a Roth IRA with $350,000 and a taxable brokerage account with another $100,000. He also has a traditional IRA from a 401(k) rollover with $375,000.
Ann has her own Roth IRA with $275,000 and a taxable brokerage account with $150,000.
Then together they have a joint brokerage account with $1,250,000 and an account in the name of their family trust with $450,000.
Assuming all these accounts are with the same investment firm, how much of their money is protected under SIPC?
All but $250,000 in their joint brokerage account. Each account listed is considered a different type of account and joint accounts are insured up to $500,000 per owner. So the joint brokerage account would be insured up to $1 million.
To cover themselves, they could move a portion of that account to another brokerage firm.
What SIPC Does Not Cover
As mentioned earlier, SIPC insurance is meant to cover investors in the event that an SIPC member investment institution fails.
However, the SIPC does not cover failed investments or declines in investment value. And there are certain types of investments that aren’t covered by the SIPC, such as commodities futures.
Also, certain types of annuities, such as those not registered with the SEC, are not covered by SIPC insurance. Non-SEC registered investments as a whole are not covered by SIPC insurance either.
Because the types of investments that are covered by the SIPC vary, it’s important to check with your broker before investing your cash to find out if an investment is covered by SIPC insurance.
SIPC Membership Changes
Another important fact about SIPC membership pertains to membership cancellation.
If your investment firm was an SIPC member but then ends its membership with the SIPC, the SIPC will continue to insure your eligible deposits for up to 180 days after the membership ends.
After that point, your eligible accounts will no longer be insured by the SIPC. For that reason, you may want to switch to another SIPC member investment brokerage.
Here’s a list of stockbrokers to check out. (All offer free trades.)
How to Know if Your Account is FDIC or SIPC Insured
Whenever you put any money into a bank or financial institution, it’s a smart idea to check and see if the institution is backed by either FDIC insurance or SIPC insurance.
At the same time, you’ll want to ensure the individual account you’re opening is covered by the appropriate applicable insurance.
You can verify insurance coverage by asking your bank representative or your investment representative. However, you may want to conduct an independent check as well.
For instance, you can check the FDIC website to see if your particular bank or institution is an FDIC member.
You can also check the SIPC website to see if your investment brokerage is an SIPC member offering SIPC insurance on eligible products.
Knowing for certain that you’re doing financial business with FDIC or SIPC backed financial institutions is very important to the safety of your money.
For the average person, it’s highly likely that your money is protected by bank failures. Most of us don’t keep over $250,000 in a savings account or invest with investment firms that are not registered with the SEC.
However, it’s still important to understand how FDIC and SIPC insurance works in case you are put in a situation where you need to rely on it. Especially if you are aggressively building your investment portfolios. As you continue to save and markets continue to rise, you may find yourself bumping up against the SIPC limits.