What we’ll cover:
If it feels like you’re doing everything online these days you’re certainly not alone. But banking? Turns out that too has become part of people’s digital lives. In fact, the number of digital banking users has grown by 20 percent in the past five years.
What’s more is how the lines between traditional banks and digital trading platforms have started to blur. For instance, some online brokerage companies have recently started offering cash accounts.
However, not all of these accounts are FDIC-insured – the standard deposit insurance offered at most traditional banks for things like checking and savings accounts. Some of the online brokerage companies – that may also offer savings accounts – are protected by SIPC (Securities Investor Protection Corporation) insurance. SIPC insurance covers assets and cash in a brokerage account up to a certain amount.
While both FDIC and SIPC insurance programs have a similar purpose – you’ve probably noticed their logos on financial websites and marketing materials – they are not interchangeable, and there are key differences in the protections they offer for customer assets. So whether you’re a consumer looking to park your money somewhere for savings goals, or if you’re looking to invest, it’s probably wise to understand what type of insurance you may be getting.
Here’s more information on what each program does, and a comparison of SIPC vs. FDIC.
The federal government created the FDIC after a wave of bank failures during the Great Depression in the 1930s. It operates as an independent federal agency to protect checking and savings accounts, some money market accounts and certificates of deposit.
If your bank has FDIC insurance, the standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. For more information on what belongs in a given category according to the FDIC, check out the FDIC-recognized account categories here.
If you have a joint account with one or more people, such as your spouse, each person is covered up to the $250,000 limit. So for example, if you and your spouse are co-owners of a CD worth $450,000, your assets in that account are fully insured.
Since the FDIC was founded in 1933, no one has ever lost money – not even a penny – in the failure of an insured institution. And while bank failures today are rare, what happens if a bank that’s FDIC-insured does in fact fail? The FDIC will either provide you with a new account, with the same balance up to the $250,000 limit, at another insured bank; or, issue a check to each account holder for the insured balance of their account at that bank.
FDIC coverage may also extend to certain retirement accounts, including some IRAs and self-directed defined contribution plans, where you can choose how the money is invested. Just keep in mind that if you have multiple retirement accounts at the same bank, they are all added together for insurance purposes. So if you’ve got multiple IRAs at a certain bank, all of the accounts combined are insured up to the $250,000 limit.
While it’s important to understand what FDIC insurance covers, it’s also good to know what it does not cover. FDIC coverage doesn’t apply to investments in stocks, bonds, mutual funds, life insurance policies, annuities or securities. Even if your bank offers investment accounts, those accounts are not covered by the FDIC.
Protecting your investment accounts is where SIPC insurance comes in.
Much like an FDIC-insured bank, if your brokerage firm is a SIPC member, money in your accounts is protected. If the brokerage fails (again this is rare), your assets are protected up to $500,000. That total coverage includes up to $250,000 in protection for cash in your account.
It’s important to understand the coverage only replaces cash and securities (such as stocks and bonds) that are lost because of the failure of the firm. If the brokerage firm closes because of financial trouble, SIPC steps in and replaces the value of your account assets, up to the coverage limit.
An important thing to note about SIPC coverage: it only protects you for the value of your assets at the time of the event. So it won’t protect you if you are sold worthless assets or invest in something as the result of bad advice from your broker.
In other words, SIPC coverage doesn’t shield you from all the risks that come with investing, but it does offer some protection if your brokerage goes out of business.
Coverage to look for
Money that's in checking accounts, savings acccounts, certificates of deposit and money market deposit accounts of covered institutions.
Securities, such as stocks and bonds, and cash held by covered brokerage instituitions.
Are there limits?
Yes, up to $250,000, per depositor, per category of account.
If you have joint accounts with one or more people, each person is covered up to the $250,000 limit.
Good to know: This coverage is per bank, so you could say, have up to $250,000 per person in covered account categories in different times.
Yes, up to $500,000 for your investments, including stocks, bonds and money market accounts. This includes up to $250,000 for cash.
Good to know: Getting bad advice doesn't trigger coverage. Why? This doesn't insure investments: it essentially protects you by insuring the brokergae.
Do you get everything back?
You can get up to $250,000 per depositor, per insured bank, for each account ownership category. If you have more than this in one account or across multiple accounts, FDIC insurance won't make up the difference.
If the Brokerage Firm closes because of financial trouble, SIPC steps in and replaces the value of your account assets, up to the coverage limit.
SIPC doesn't protect you from all the risks that come with investing, but it does protect you if your brokerage goes out of business.
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