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Ashley works with clients to bring strategy, structure, clarity and confidence to their global financial lives and keep it that way. ​In 2013, Ashley founded Arete Wealth Strategists, a fee-only financial planning and investment management firm for Australian/American expatriates.
April 10, 2023

What is FDIC Insurance, How does it Compare to SIPC Insurance and how do they Work?

What is FDIC Insurance and How Does it Work?

  • SIPC and FDIC insurance offer financial compensation if your eligible financial provider fails.
  • SIPC insurance applies to securities, while the FDIC applies to various types of bank accounts (e.g. savings and checking accounts).
  • There are limits to how, when and how much money SIPC or FDIC insurance reimburses. The SIPC does not cover market losses or market volatility.

The Federal Deposit Insurance Corporation (FDIC) provides deposit insurance to protect consumers in case their bank or financial institution fails. The FDIC was formed in 1933 with the purpose of building public trust in the U.S. banking system and to shore up financial stability.

It’s important to know the difference between the SIPC and FDIC insurance protection plans. Both cover different elements of your financial life: The SIPC covers certain kinds of securities and investments, while FDIC coverage sticks to deposit accounts. Both can help you recoup losses in the event that your banking partner fails, helping you build peace of mind that you can access the money you may have with a now-insolvent financial institution. Also, bear in mind that FDIC insurance coverage does not include credit unions. Credit unions receive similar protections through the National Credit Union Administration (NCUA) instead. You can contact a local credit union for more information on NCUA protections and how they compare to SIPC and FDIC insurance programs.

Understanding FDIC Insurance Coverage

FDIC insurance coverage isn't unlimited. The basic FDIC insurance limit is $250,000 per depositor, per insured bank account. This means that if you have multiple accounts at the same bank, the total amount of FDIC insurance coverage for all of your accounts is $250,000. For example, if you have a checking account with $100,000 and a savings account with $200,000 at the same bank, only $250,000 is insured.

It's also important to note that the FDIC doesn't insure all types of accounts. The FDIC only insures deposit accounts like checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs). It doesn't insure investments like stocks, bonds, mutual funds, or annuities, even if they were bought from an FDIC-insured bank, that is where the SIPC comes in that we’ll discuss later on.

FDIC insurance does not cover money invested in stocks, bonds, mutual funds, life insurance policies, annuities, municipal securities, or money market funds, even if these investments were bought from an insured bank. It is always wise to put your money in an FDIC-insured bank.

FDIC insurance coverage happens automatically, and you won't have to take any action. If you want to verify if your bank is FDIC-insured, you can search the FDIC's database of registered members or look for FDIC membership indicated on your bank's website.

If your bank fails, the FDIC can do one of two things. First, it can arrange the sale of a failed bank to another bank. Alternatively, the FDIC can pay out funds to depositors directly by sending out checks to people who had accounts at the bank. The FDIC can pay out up to $250,000 per depositor, per insured bank.

How to Obtain the Maximum FDIC Coverage

To obtain the maximum FDIC coverage, you need to understand how the FDIC calculates coverage for different types of accounts.

Single Accounts

A single account is a deposit account owned by one person. FDIC insurance covers up to $250,000 per owner for all single accounts at each bank. If you have multiple single accounts at the same bank, they will be pooled together and insured up to $250,000.

Joint Accounts

A joint account is a deposit account owned by two or more people. FDIC insurance covers up to $250,000 per owner for all joint accounts at each bank. When a deposit account is owned by two or more people, each co-owner's share of the account is insured up to $250,000. For example, if you have a joint checking account with your spouse with a balance of $500,000, you're both covered up to the full $250,000 limit.

Trust Accounts

For revocable trusts, all accounts owned by the same person at the same bank are added together and insured up to $250,000 per beneficiary. For irrevocable trusts, the noncontingent interest of each unique beneficiary is insured up to $250,000. Beginning in April 2024, irrevocable trusts will be insured the same way revocable trusts are.

To maximize your FDIC coverage, you can do the following:

  1. Open accounts at multiple banks with multiple account types: If you have more than $250,000 in deposits, you can open accounts at multiple banks to increase your FDIC coverage. Each bank is insured separately, so you can get up to $250,000 in coverage for each account you have at each bank.
  2. Use different ownership categories: If you have multiple accounts at the same bank, you can use different ownership categories to increase your FDIC coverage. For example, you can have a single account, a joint account with your spouse, and a trust account for your children, and each account would be insured up to $250,000.

What Happens when a Bank Fails

When a bank fails, the FDIC tries to identify another financial institution that can take on the failed bank’s assets. If they are able to identify a qualifying bank to take over these accounts, you can use your account with the new institution. If, however, the FDIC cannot find another bank with the ability to take on these new accounts, the organization issues checks to depositors for the total of their eligible accounts.

Understanding SIPC Insurance Coverage

The SIPC is a private, federally mandated nonprofit organization that came out of the Securities Investor Protection Act of 1970. The act is designed to help protect investment accounts from insolvent brokerages, namely by helping them regain their money if a brokerage goes under. SIPC insurance does not cover the value of your stocks, bonds or other investments. Rather, the SIPC replaces your missing stocks and other securities when possible.

What is SIPC Insurance?

What Does SIPC Insurance Cover?

SIPC insurance protects assets held in brokerage accounts. Covered assets held in a brokerage account can include:

  • Stocks
  • Bonds
  • Broker-issued certificates of deposit
  • Mutual funds
  • Money market funds
  • Not all investments are covered. Currency, commodity futures, fixed annuity contracts and unregistered investments are all off the table.
  • The SIPC offers a full list of covered securities on their website.

It’s important to note that there’s one thing the SIPC doesn’t do, and that’s protecting investors against financial losses. It’s also worth noting that the SIPC does not cover investors from acting on bad investment advice or for incorporating inappropriate investments into their portfolio. Rather, the SIPC replaces you for missing stocks and other securities when possible if the brokerage firm fails.

How Does SIPC Insurance Work?

If a brokerage firm fails, the trustee overseeing the liquidation should send you a claim form. If not, you can file one on your own to get the ball rolling. SIPC protections kick in if a brokerage goes under and you've led a claim to receive coverage. SIPC protection is not the same as protection for your cash at an FDIC-insured banking institution because SIPC does not protect the value of any security but the security (or position) itself (i.e. regardless of what’s happened to its value).

SIPC Coverage Limits

Just like the FDIC, the SIPC imposes limits on coverage. The SIPC coverage limit is $500,000 in total value per customer. Of that $500,000, $250,000 can be cash. That’s helpful to know if you regularly keep uninvested cash in your brokerage account.

Here are some examples of what your coverage may look like, depending on whether you’re single or married and what type of accounts you have:

  • Single account: $500,000 total value, $250,000 of which can be cash
  • Joint account: $1,000,000 total value, $500,000 of which can be cash
  • IRA account: $500,000 total value, all of which can be cash

Key Differences between FDIC and SIPC Insurance

One key difference between the FDIC and SIPC is the types of accounts they cover. FDIC insurance covers banking products such as deposit accounts, such as checking and savings accounts, held by FDIC member banks. SIPC insurance on the other hand, protects against missing cash and other securities in brokerage accounts held by SIPC members in the event of a brokerage firm’s failure, SIPC insurance does not against investment losses.

Assuming that you are doing business with an FDIC- or SIPC-insured bank or brokerage, then a failure may be nothing more than an inconvenience. Either institution can act to ensure that you have access to your funds as quickly as possible following a bank or brokerage's shutdown.

In conclusion, both SIPC and FDIC can help protect your wealth, though coverage varies. They are also unique in how funds are paid out if your assets are compromised. Understanding the differences between SIPC vs. FDIC insurance coverage is important in the event that a worst-case scenario happens and your brokerage or bank fails.

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