Federal Deposit Insurance Corporation (FDIC) insurance and Securities Investor Protection Corporation (SIPC) insurance are two important features of our financial system. Both are designed to protect consumers from losses when a financial institution fails, but the two programs apply to entirely different types of accounts.
Learn the history behind these two types of insurance, what they cover, and why it’s critical to have both in your financial toolbox.
What’s the Difference Between FDIC Insurance and SIPC Insurance?
|FDIC Insurance||SIPC Insurance|
|Agency||Federal Deposit Insurance Corporation||Securities Investor Protection Corporation|
|Type of account covered||Deposit accounts||Brokerage accounts|
|Coverage amount||$250,000 per depositor, per insured bank, for each account ownership category||$500,000 (up to $250,000 for cash)|
The first difference between FDIC insurance and SIPC insurance is that they’re administered by different agencies. Both the FDIC and SIPC are independent agencies created by Congress to protect Americans’ money.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency that began in 1933 in response to the bank failures throughout the Great Depression. It was created by the Banking Act of 1933 (also known as the Glass-Steagall Act), which was signed into law by President Franklin Roosevelt.
The job of the FDIC is to create stability in the U.S. banking system and instill confidence in consumers. The agency has three primary jobs:
- Insuring deposits in bank accounts
- Supervising and examining banks to ensure their financial health
- Responding to the failure of a bank.
The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation designed to keep investors’ money safe. The SIPC was created in the Securities Investor Protection Act of 1970. Congress passed the act in response to a difficult period for the stock market when many broker-dealers merged, were acquired by other firms, or went out of business.
The job of the SIPC is to protect investors’ assets if a brokerage firm goes bankrupt or out of business and can’t return their money.
Types of Accounts Covered
One of the most important differences between FDIC insurance and SIPC insurance is the type of accounts each one covers. FDIC insurance protects your money in banking deposit accounts, including:
- Checking accounts
- Savings accounts
- Money market deposit accounts
- Certificates of deposit and other time deposits
- Negotiable Order of Withdrawal (NOW) accounts
- Cashier’s checks, money orders, and other official bank-issued items
SIPC insurance protects your investments in SIPC-member brokerage firms. It applies to both cash and securities in your brokerage account, including:
- Treasury securities
- Certificates of deposit
- Mutual funds
- Money market mutual funds
SIPC coverage doesn’t apply to certain investments, including commodity futures contracts, foreign exchange trades, investment contracts, or fixed annuity contracts not registered with the Securities and Exchange Commission.
The final significant difference between FDIC insurance and SIPC insurance is the amount covered for each account holder.
FDIC insurance provides $250,000 of coverage per depositor, per insured bank, for each account ownership category. The different ownership categories are:
- Single accounts
- Joint accounts
- Certain retirement accounts, such as individual retirement arrangements (IRAs)
- Revocable trust accounts
- Corporation, partnership, and unincorporated association accounts
- Irrevocable trust accounts
- Employee benefit plan accounts
- Government accounts
One person could have far more than $250,000 of coverage at a single bank. For example, suppose you have a single checking account, a single savings account, a joint savings account with your spouse, and an IRA. You would have $250,000 of coverage for each of those account categories, and your single checking and savings accounts both fall into the same ownership category. That means you’d have a total of $750,000 of coverage.
SIPC insurance provides up to $500,000 of protection for each investor’s securities and cash in their brokerage account, but there’s a limit of $250,000 for cash.
An investment account is quite different from a deposit account in that the former can lose value. SIPC insurance doesn’t protect you against any decline in the value of your investments. Instead, it’s designed specifically to make you financially whole if your brokerage firm goes bankrupt or out of business and doesn’t return your money.
FDIC and SIPC Insurance: Why You Need Them
With FDIC and SIPC insurance, it’s not a matter of choosing between the two. These two types of insurance are crucial pieces of the financial puzzle for anyone with a deposit or investment account.
The good news is that FDIC and SIPC insurance aren’t types of insurance that you have to purchase. Instead, banks and brokerage firms carry this coverage for all of their customers. When choosing the bank where you’ll hold your money and the brokerage firms where you’ll do your investing, be sure to check that they have the necessary insurance.
In the case of FDIC insurance, you can look for the words “Member FDIC” on the bank’s website. You can also call the bank to ask them directly; call the FDIC to find out if a bank is covered; or use the FDIC’s BankFind Suite tool, which provides a database of all FDIC-insured banks.
This coverage only applies to banks—credit unions aren’t FDIC-insured. A separate organization called the National Credit Union Administration provides a similar type of coverage to credit unions.
To determine if a brokerage firm offers SIPC insurance, look for the words “Member SIPC” on its website or check out the list of insured brokers and dealers on the SIPC’s website.
The Bottom Line
Whether you’re opening a checking account for your day-to-day spending, putting money into a savings account to use in emergencies, or setting up a brokerage account to invest for retirement, it’s important to ensure your money is safe.
FDIC insurance and SIPC insurance are two types of coverage created by the federal government to protect consumers from financial losses. Any reputable financial institution should carry the appropriate type of coverage on its customers’ behalf.