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SIPC vs. FDIC: Insurance Protection Differences

Milana Budisavljevic, Preferred Banking Office Manager, First Republic Bank
May 19, 2022

  • SIPC and FDIC insurance offer financial compensation if your eligible financial provider fails.
  • SIPC insurance applies to securities, while the FDIC applies to deposit 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 Securities Investor Protection Corporation (SIPC) and Federal Deposit Insurance Corporation (FDIC) are organizations that provide insurance for financial accounts. Each helps protect assets in different kinds of accounts: SIPC insurance helps protect assets in a brokerage account (such as stocks, bonds, and ETFs), whereas the FDIC insures money you have in a deposit account with a financial institution. 

It’s important to know the difference between SIPC and FDIC insurance and how they complement one another. Here are some of the main similarities and differences between them.

  SPIC FDIC
What It Covers Brokerage-held securities and cash Funds in deposit accounts
Coverage Limit $500,000 for securities; $250,000 for cash reserves $250,000 per depositor, per insured bank, for each account ownership category
When It Applies When a brokerage firm fails When a bank fails
How It Works You receive money, up to these limits, based on your account totals at the failed firm You receive money if your deposit bank closes, covering up to the coverage limit

 

What is SIPC insurance?

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 kicks in when the SIPC receives an indication from the Securities and Exchange Commission (SEC) that a broker-dealer fails and its customers will lose securities or cash. Thus, this insurance helps safeguard your investments in the event that your brokerage firm goes out of business. SIPC protection is not the same as protection for your cash at a FDIC-insured banking institution because SIPC does not protect the value of any security. It’s worth noting that 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 financial products does SIPC insurance cover?

SIPC protection encompasses cash stored with brokerage firms for the purchase of securities, as well as the securities themselves. These include stocks, bonds, among other securities. The SIPC homepage offers a full list of covered securities. 

Bear in mind that SIPC coverage only includes cash and securities at firms that are SIPC members. You’re limited to $500,000 per account (and up to $250,000 for cash) per firm, which means you may be able to get SIPC coverage from more than one member firm if you have accounts at several different brokerages.

How does SIPC coverage work?

SIPC protections kick in if a brokerage goes under and you've filed a claim to receive coverage. The SIPC does not cover market losses, any promises of investment performance or commodities or futures contracts. 

Unlike the FDIC, which proactively processes claims, the SIPC requires you to file claims. 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. 

The SIPC does not protect against risk or market volatility.

What is FDIC insurance?

The FDIC is designed to give people confidence that they can receive compensation if their bank goes under. The FDIC was borne of the Great Depression, when banks went insolvent as financial markets collapsed. Since 1933, the FDIC has helped Americans bank with confidence via the full faith and credit of the federal government. 

FDIC insurance helps insure assets in deposit accounts at member banks in the event that the bank fails. This means you can recoup your bank account’s funds through the insurance program if your banking partner can’t pay your money back directly. This helps put money back in your pocket if a bank goes under and others do not acquire its clients.

What financial products does FDIC insurance cover?

FDIC insurance covers a variety of deposit accounts at member financial institutions. These include but are not limited to the following:

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.

How does FDIC coverage work?

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.

The FDIC insures up to $250,000 per depositor, per insured bank, for each account ownership category. For example, you can receive FDIC reimbursement for two different high-yield savings accounts so long as they’re at different financial institutions. If you had two high-yield savings accounts at the same bank, you can’t get coverage on both. Additionally, if your spouse had $500,000 in an account, that full amount would be covered because if you are both signers on the account, you are both eligible for up to $250,000 each.

Smart banking decisions are key

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 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. 

If you want to know more about how SIPC and FDIC insurance works, consider speaking to a financial professional. They will be able to go over the pros and cons, as well as best practices for maximizing your protection. You’ll walk away with a stronger sense of how you can protect your assets in the event of unforeseen circumstances.

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