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SIPC insurance and FDIC insurance offer different types of financial peace of mind. The former protects certain investments in the unlikely event that a registered brokerage firm fails. FDIC insurance covers deposit accounts, such as checking and savings accounts, that are held by FDIC members. Both can help protect your wealth, though coverage varies. They're also unique in how funds are paid out if your assets are compromised.
Here's a basic breakdown of the two types of coverage:
| SIPC vs. FDIC Insurance | ||
|---|---|---|
| SIPC | FDIC | |
| What's covered | Brokerage accounts holding cash and other securities with SIPC members. Stocks, bonds, mutual funds, Treasury securities and certificates of deposit are all covered. | Deposit accounts held by FDIC members. That covers checking and savings accounts, certificates of deposit, money market accounts, cashier's checks, negotiable order of withdrawal (NOW) accounts and money orders. |
| Coverage limit | Up to $500,000, half of which can cover missing cash. | Up to $250,000 per depositor, per bank, for every ownership category (single accounts, joint accounts, certain retirement accounts, etc.). |
| When it applies | SIPC insurance will step in if the brokerage firm goes bankrupt or becomes insolvent. Assets lost due to unauthorized trading are covered as well. | FDIC insurance applies when a bank fails and cannot return financial assets to its customers. |
What Is FDIC Insurance?
Provided by the Federal Deposit Insurance Corporation, FDIC insurance is designed to protect consumers if their bank or financial institution fails. This happens when the bank is unable to meet its financial obligations and cannot return assets to customers. When banks failed during the Great Depression, many people suffered huge financial losses as their life savings went down with the ship. To help shore up financial stability and build public trust in the U.S. banking system, the federal government formed the FDIC in 1933.
Virtually all U.S. banks are FDIC-insured. You can search the FDIC's database of registered members or look for FDIC membership indicated on your bank's website. Credit unions are structured a little differently, but most are insured by the National Credit Union Administration (NCUA).
If something goes sideways at your bank and you need to get reimbursed, you won't have to take any action. FDIC insurance coverage happens automatically.
What FDIC Insurance Covers
FDIC insurance covers up to $250,000 per depositor, per bank account, for every insured ownership category. That includes deposit accounts like checking accounts, savings accounts, money market accounts and certificates of deposit (CDs). Coverage limits depend on the way your deposits are held, or the ownership category.
- Single accounts without named beneficiaries: If you own multiple single accounts at the same bank, they will be pooled together and insured up to $250,000.
- Joint accounts without named beneficiaries: Each co-owner's shares of joint accounts at the same bank are combined and insured up to $250,000.
- Certain retirement accounts: Accounts like 401(k)s and individual retirement accounts (IRAs) are covered up to $250,000 per owner.
- Trust accounts: All revocable trusts held at the same bank by the same person will be put together. The owner will be insured up to $250,000 per beneficiary. For irrevocable trusts, the noncontingent interest of each unique beneficiary is insured up to $250,000. But beginning in April 2024, irrevocable trusts will be insured the same way revocable trusts are.
The FDIC also insures employee benefit plan accounts, government accounts and certain business accounts, though coverage amounts vary.
What Is SIPC Insurance?
Just as FDIC insurance covers deposit accounts, the Securities Investor Protection Corporation (SIPC) protects cash and other securities in brokerage accounts held by SIPC members. The organization started after the U.S. securities market experienced an especially turbulent period in the late 1960s. As many broker-dealers went under, investors were on their own.
The majority of brokerage firms registered with the Securities and Exchange Commission (SEC) are SIPC members, but you can search for them on the SIPC database to be sure. You can also scan your brokerage firm's website to confirm their membership.
In the event you need to get reimbursed, 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.
What SIPC Insurance Covers
If an SIPC-insured brokerage fails or uses your account to make unauthorized trades, you'll be covered up to $500,000. Half of that amount can be used for missing cash. To be clear, regular investment losses are not covered. The same goes for assets that simply underperformed. Investing is risky by nature—SIPC insurance is meant to protect investors who lose money because their brokerage firm fails them, not because they took investment risks. The following types of assets are covered if they're held with an SIPC member:
- Cash
- Stocks
- Bonds
- Mutual funds
- Money market mutual funds
- CDs
- Treasury securities
Not all investments are covered. Currency, commodity futures, fixed annuity contracts and unregistered investments are all off the table.
Why FDIC and SIPC Insurance Matters
You can do everything right in terms of budgeting and making wise investment choices, but it won't mean much if your financial institution doesn't do their part. Banking with FDIC-insured banks and working with SIPC-insured brokerage firms is a simple way to protect your wealth.
If you have a lot of assets and you're worried that FDIC and SIPC coverage limits are too low, you might consider spreading your accounts out at different financial institutions. It could minimize your losses in the rare event that one of them fails.
The Bottom Line
FDIC insurance and SIPC insurance are two things you hope you won't ever need—but it's there for you all the same. Both are designed to reassure folks that their money is safe and they can trust the U.S. financial system. During stressful economic times, it might help you sleep a little better.
In the meantime, you can continue being proactive with your financial health. This includes maintaining strong credit so you'll always have access to the best financing options. That's why Experian allows you to check your free credit score and credit report at any time.