What Are Uninsured CDs

Uninsured CDs Explained in Less Than 5 Minutes

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An uninsured certificate of deposit (CD) is a CD that isn’t insured by the National Credit Union Administration (NCUA) or the Federal Deposit Insurance Corporation (FDIC). Without that insurance, you risk losing your money if the issuing financial institution fails. That said, you could potentially earn higher returns than a conventional CD offers. 

Learn more about uninsured CDs, how they work, and if one might be right for your investment strategy. 

Definition and Example of an Uninsured CD

An uninsured CD is a CD that’s not federally insured by the FDIC or NCUA, which leaves you vulnerable to loss if the issuing bank or credit union fails.

Ever since the Federal Deposit Insurance Act was enacted in September of 1950, the FDIC has insured the deposits of all of its member banks and savings associations. Similarly, in 1970, the NCUA began insuring credit union deposits. 

Both the FDIC and NCUA now insure up to $250,000 per depositor, per account. 

For example, say you come across a CD offered by a foreign bank with an interest rate that’s far above the best rates for most domestic CDs. If you deposit the principal amount for a five-year term and the bank closes on year three, you could lose all of the money you deposited plus any earnings. However, if you had invested in an FDIC-insured CD, you’d receive your deposit plus any accrued interest you’d earned so far, up to the $250,000 limit.

While most CDs are insured today, there are some exceptions. You may find uninsured CDs from foreign banks, U.S. branches of foreign banks, brokered CDs, and more. 

Types of Uninsured CDs

To better understand how uninsured CDs work, let’s take a closer look at the different types you may find.  

Market-Linked CDs

Market-linked CDs, or equity-linked CDs, are CDs where your rate of return is based on a stock index like the S&P 500. These are partially uninsured because the FDIC only insures accrued interest through the date of a bank’s closing.

While regular CDs pay out interest at regular intervals throughout the term, market-linked CDs calculate your returns on your maturity date. So if an insured bank fails before your maturity date, your deposit would be refunded but your interest potential would be lost.

Yankee CDs

Yankee CDs are large negotiable CDs typically of $100,000 or more issued through U.S. branches of foreign banks, often found in New York. The major issuers are often large international banks from Canada, England, Western Europe, and Japan.

While the branches are in the U.S., the issuing banks are foreign so the CDs aren’t covered by FDIC insurance.

Brokered CDs

Brokered CDs are CDs bought by brokerage firms and resold to individual investors. While many are FDIC-insured, some aren’t. When the requirements are met, FDIC insurance can pass through from the broker to you. 

Your brokered CD may not have insurance if it’s categorized as a security rather than a bank product. It also must be provided by an institution that’s FDIC-insured and the account must be registered in your name or held in your name by a trustee or custodian.

CDs over $250,000

The FDIC and NCUA limit insurance coverage to $250,000 per depositor, per institution. So, any amount you have in a CD that’s over the $250,000 limit wouldn’t be insured. 

The limit applies to all deposit accounts a person holds at an institution. So if you have a savings account and two CDs with the same bank, the $250,000 limit would apply to the cumulative total of all the money in all three accounts. 

CDs From FDIC Nonmembers

While most U.S. banks are federally insured, there are a few exceptions. For example, deposits at the Bank of North Dakota (BND) are backed by the State of North Dakota instead of the FDIC.

Further, foreign banks aren’t eligible for FDIC insurance. So, before signing up for a CD, be sure to check the insurance situation of the issuing bank or credit union.

Are Uninsured CDs Worth It?

Whether uninsured CDs are right for you will depend on the offers available, your risk tolerance, and your ability to mitigate the risks. For example, you will face more risk with a market-linked CD than a conventional CD. However, if you’re experienced with market-linked investments and your bank has a long-standing positive credit rating, it could make sense.

On the other hand, if a foreign bank offers a very attractive interest rate but has a poor credit rating and requires a long-term commitment, the investment would be risky. You’ll need to consider each uninsured CD opportunity carefully to decide if the reward potential outweighs the chance of loss due to a bank failure. 

Moody's, Fitch Ratings, and S&P Global Ratings are three of the leading global credit rating companies that analyze how likely banks are to go out of business. Reduce your risk by checking the credit rating of institutions issuing uninsured CDs and avoiding those with poor scores.

Key Takeaways

  • Uninsured CDs don’t have FDIC or NCUA insurance in place to protect your investment if the issuing bank or credit union fails. 
  • Most CDs are insured by the FDIC or NCUA for up to $250,000 per depositor. 
  • Uninsured CDs are offered by foreign banks through products like Yankee CDs.
  • If your account exceeds the insurance limits or if your interest accrues on the maturity date, your CD may be partially insured.
  • Reduce your risk by checking the credit ratings of banks issuing uninsured CDs. 

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