FDIC Insurance Versus SIPC: Differences and Protections

By: Scott Sturgeon, JD, MBA, CFP®

Would you like to receive more content just like this directly to your inbox? Click here to subscribe!

Investors and depositors often hear about two forms of insurance that offer protection in case of a financial institution’s failure: the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC). While both forms of protection aim to safeguard investors and depositors, there are some significant differences in their coverage and scope.

This article will explore the key differences and protections offered by FDIC insurance and SIPC, how they work, and what investors and depositors should know about them.

In this article, we’ll review:

1.Understanding FDIC Insurance

2.Understanding SIPC Protection

3.Coverage Differences Between FDIC and SIPC

4.Conclusion: What is the Right Protection for Your Needs?

 

Understanding FDIC Insurance:

1.1 What is the FDIC?

The Federal Deposit Insurance Corporation (FDIC) is an independent government agency established in 1933 to protect depositors in case of bank failures. The FDIC insures deposits at banks and savings associations up to a certain limit, which is currently $250,000 per depositor per institution.

1.2 How Does FDIC Insurance Work?

FDIC insurance works by protecting depositors in case of a bank failure. If a bank fails, the FDIC steps in to pay out insured deposits to depositors, up to the coverage limit. This means that if you have deposits in a bank or savings association that is FDIC-insured, your deposits are protected up to $250,000 per depositor, per institution, per ownership category.

1.3 What Types of Accounts Does FDIC Insurance Cover?

FDIC insurance covers deposits in various types of bank accounts, including:

– Checking accounts

– Savings accounts

– Money market deposit accounts

– Certificates of deposit (CDs)

– Some Individual Retirement Accounts (IRAs)

1.4 What Is the Coverage Limit for FDIC Insurance?

The coverage limit for FDIC insurance is $250,000 per depositor, per institution, per account ownership category. This means that if you have multiple accounts at the same bank or savings association, your total deposits are insured up to $250,000 or $500,000 for joint account between spouses.

For example, if you have a checking account with $150,000 and a savings account with $100,000 at the same bank, both in your individual name with no beneficiaries, your total deposits of $250,000 are fully insured by the FDIC. However, if you have deposits over $250,000 at a single bank or savings association, the amount over the coverage limit is not insured. 

It’s important to remember however, that each additional party added to an account can increase the amount of total coverage. For example, in the same situation above, by adding a co-owner to your checking & savings account, your combined coverage amount increases to $500,000 total or $250,000 per person.

1.5 How Are Deposits Insured by the FDIC?

Deposits are insured by the FDIC through premiums paid by the banks and savings associations. These premiums are based on the amount of deposits held by the institution and the risk profile of the institution. The FDIC uses these premiums to fund the deposit insurance fund, which is used to pay out insured deposits in case of a bank failure.

 

Understanding SIPC Protection:

2.1 What is SIPC Protection?

The Securities Investor Protection Corporation (SIPC) is a non-profit organization established by Congress in 1970 to protect investors in case of brokerage firm failures. SIPC protection is different from FDIC insurance in that it protects investors from losses due to brokerage firm failures, rather than bank failures.

2.2 How Does SIPC Protection Work?

SIPC protection works by stepping in to help investors recover their securities and cash held by a failed brokerage firm. SIPC coverage is limited to $500,000 per customer, which includes up to $250,000 in cash.

If a brokerage firm fails, SIPC steps in to arrange the transfer of securities and cash held by the failed firm to another brokerage firm, so that investors can continue to access their investments. If the failed firm is unable to transfer the assets, SIPC steps in to cover losses up to the coverage limit.

2.3 What Types of Accounts Does SIPC Protect?

SIPC protection covers securities held in brokerage accounts, including:

– Stocks

– Bonds

– Mutual funds

– Exchange-traded funds (ETFs)

– Cash

2.4 What is the Coverage Limit for SIPC Protection?

The coverage limit for SIPC protection is $500,000 per customer, which includes up to $250,000 in cash. This means that if you have securities and cash held in a brokerage account that is SIPC-protected, your assets are protected up to $500,000.

However, it’s important to note that SIPC protection does not cover losses due to market fluctuations or investments that decline in value. SIPC protection only covers losses due to the failure of a brokerage firm.

2.5 How Are Investors Protected by SIPC?

Investors are protected by SIPC through contributions made by member brokerage firms. SIPC members are required to contribute to the SIPC fund, which is used to cover losses in case of a brokerage firm failure. If a member firm fails, SIPC steps in to use the fund to help investors recover their assets.

 

Differences and Protections of FDIC Insurance versus SIPC:

While both FDIC insurance and SIPC protection provide protections to consumers, there are some key differences between the two. Below are some of the main differences and protections offered by each:

3.1 Coverage Limits

The coverage limit for FDIC insurance is $250,000 per depositor, per institution, for each account ownership category, while the coverage limit for SIPC protection is $500,000 per customer, which includes up to $250,000 in cash. 

While both protections offer coverage limits, the way in which the limits are applied differs. FDIC insurance covers each depositor up to $250,000 per institution, but the effective amount of coverage someone could obtain for their entire family’s cash holdings is much larger if structured properly. In contrast, SIPC protection covers each customer up to $500,000, which includes up to $250,000 in cash, but is based on the total assets held by the customer at the individual brokerage firm. 

3.2 Types of Accounts Covered

FDIC insurance covers deposits in various types of accounts held at banks and savings associations, including checking accounts, savings accounts, money market deposit accounts, certificates of deposit, and individual retirement accounts.

SIPC protection, on the other hand, covers securities held in brokerage accounts, including stocks, bonds, mutual funds, exchange-traded funds, and cash.

3.3 Risks Covered

FDIC insurance covers depositors against losses due to bank failures, while SIPC protection covers investors against losses due to brokerage firm failures.

However, it’s important to note that FDIC insurance only covers losses due to the failure of the bank, while SIPC protection covers losses due to the failure of the brokerage firm, as well as losses due to theft or fraud by the brokerage firm.

3.4 Funding

FDIC insurance is funded through premiums paid by banks and savings associations, based on the amount of deposits held and the risk profile of the institution. SIPC protection is funded through contributions made by member brokerage firms.

3.5 Claims Process

The claims process for FDIC insurance and SIPC protection also differs. If a bank fails, depositors do not need to file a claim with the FDIC to receive their insured deposits. The FDIC will automatically transfer the insured deposits to another FDIC-insured institution, or pay out the insured deposits directly to the depositor if no other institution is available to accept the transfer.

If a brokerage firm fails, investors must file a claim with SIPC to receive compensation for their losses. SIPC will review the claim and work to arrange the transfer of the investor’s assets to another brokerage firm, or provide compensation up to the coverage limit if the transfer is not possible.

4. Conclusion: What is the Right Protection for Your Needs?

Both FDIC insurance and SIPC protection offer important protections to consumers, but they differ in terms of the types of accounts covered, the risks covered, the coverage limits, funding, and the claims process. With so many differences, how can you determine the right approach for you or your business to hold large amounts of cash right now?

The answer to that question is highly contingent on your individual circumstances, time horizon, the composition of your investable assets, and what your overall goals are for your cash and investments. Remember, consumers with deposits in banks and savings associations should ensure that their deposits are FDIC-insured, while investors with securities held in brokerage accounts should ensure that their accounts are SIPC-protected. There are a variety of ways to go about doing that, especially for those with cash deposits that may exceed the total FDIC insurable amount.

By understanding the differences and protections of FDIC insurance versus SIPC, consumers and investors can make informed decisions to protect their assets and ensure their financial security. If the recent news of bank failures has you questioning how much FDIC or SIPC coverage you have or may need, consider reaching out to schedule a time to consult with us to provide insights based on your specific financial situation.

SCHEDULE BY CLICKING HERE

Still curious to learn more? Check out the content below!

The #1 Hidden Retirement Risk You May Not Be Aware Of