FDIC vs SIPC: What Do They Cover?

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With so much uncertainty when it comes to financial planning, worrying that your bank or investment firm may go bankrupt can just be one more thing on your list. Luckily there are safeguards in place to prevent you in these situations. Enter FDIC and SIPC insurance – two key players that work behind the scenes to protect your hard-earned money.

While they don’t protect you from everything, they do insure you against some of the risks of a bank or investment firm closing its doors while they’re holding your assets.

FDIC vs SIPC: What You Need to Know

If you have a bank account in the U.S., you’re probably familiar with FDIC insurance. Similarly, investors will likely recognize SIPC from their broker. However, most account holders don’t truly understand the coverage these programs provide.

Next, we’ll take a deep dive into FDIC vs SIPC and explain the in’s and out’s of each.

What is FDIC Insurance?

FDIC Insurance is backed by the Federal Deposit Insurance Corporation, a United States government agency. The federal government established the agency in 1933, shortly after a wave of Great Depression bank failures began. The FDIC maintains stability and public confidence in the nation’s financial system by insuring most consumer deposits.

FDIC Insurance automatically applies to checking, savings, certificates of deposit, and money market accounts in the U.S. The coverage comes with your bank account, so you don’t need to purchase a separate policy.

Although it might seem rare, the FDIC says an average of 25 banks fail each year. As recently as early 2023, several banks came close to collapsing after Silicon Valley Bank and Signature Bank went under.

The FDIC acted swiftly to make depositors whole in 2023, and they once again demonstrated the program’s value to the public in the process.

What is SIPC Insurance?

SIPC Insurance refers to the protections provided by the Securities Investor Protection Corporation (SIPC), a nonprofit organization that plays a critical role in the financial security of investors in the United States. Established in 1970, the SIPC’s fundamental purpose is to restore funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms.

It’s important to note that SIPC Insurance does not protect against bad financial decisions or investments. It only ensures that you can access your cash and assets if your brokerage shuts down or becomes illiquid.

SIPC Insurance covers stocks, bonds, notes, and mutual funds.

Key Differences Between SIPC and FDIC

There are several differentiating features between SIPC and FDIC.

Dollar Limits

The FDIC insures a maximum of $250,000 per depositor, per FDIC-insured bank, for each account ownership category. This means that an individual can have multiple insured accounts at the same bank, but the total coverage across all the accounts would not exceed $250,000. Not that for jointly owned accounts, the account would be insured up to $500,000 since each person receives insurance of $250,000.

The SIPC covers up to $500,000 per customer, including a $250,000 limit for cash, at each SIPC-member brokerage firm. The protection of $500,000 per customer is not per account. For example, if an investor has both a personal account and an IRA at the same brokerage, the combined value of both accounts is protected up to $500,000 (with the cash limit of $250,000 still applicable). Unlike the FDIC insurance, the insurance is based on a per-account figure, not per person, so joint investment accounts do not receive any additional protection.

Coverage Limitations

One of the main limitations of FDIC insurance is that it doesn’t cover investments, even if they are purchased through a bank. FDIC only covers cash (or cash equivalents) held by banks. Once the FDIC steps in, you are supposed to have access to the fund as soon as possible, but it’s possible that there will be administrative delays.

SIPC only covers your access to your securities, it doesn’t protect against declines in the value of your investments. The SIPC will work on transferring your securities to another brokerage, but there may be delays, and your investment may lose value during that time.

Real World Examples

Let’s look at a few examples of where both of these important insurances came into place.

Scenario 1: FDIC

During the 2008 global financial crisis, Washington Mutual bank collapsed due to bad mortgage loans and a run by depositors. It still stands as one of the largest bank failures in U.S. history.

When WaMu failed, The FDIC made good on its coverage promise and ensured depositors didn’t lose their money. However, the agency didn’t protect deposits that exceeded its coverage limits.

Scenario 2: SIPC

In the early 2000s, a brokerage firm named MJK Clearing declared bankruptcy. This firm went out of business due to financial losses, causing concern among its investors about the safety of their securities and cash. In this instances, the SIPC stepped in and took over the brokerage to ensure that investors received their cash and investments (up to the coverage limits).

FDIC vs SIPC: Why They’re Both Important

Both FDIC and SIPC are essential to ensure investor and saver confidence. Without this type of insurance, the banking and investment systems would be subject to runs on the bank which upset the stability of the entire system.

However, FDIC & SIPC coverage has limits. Higher earners should consider splitting their assets between several institutions, so their balances don’t exceed the coverage limits. FDIC limits only apply to the balances kept with a single institution, but spreading your money across several banks will keep your balances below the coverage thresholds.

Keep in mind that neither type of insurance protects you against bad investment decisions or poor planning.

Final Thoughts

It’s important for all investors to understand the protections from FDIC and SIPC insurance. FDIC ensures depositor confidence by insuring up to $250,000 per individual for each bank, inclusive of savings, checking, CDs, and money markets, though it excludes investment products.

SIPC insurance safeguards investors up to $500,000, with a $250,000 cash limit, protecting against the insolvency of brokerage firms. However, it doesn’t cover you against bad investment decisions.

If you have substantial assets, you may want to hold them at several banks or brokerages so you don’t exceed the insured limits. Although this might be a hassle, the added protection could prove worthwhile if one of your financial institutions fails.

Both types of insurance ensure public confidence in the financial system, and they can provide valuable protection against economic uncertainty.

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