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?
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 accountsSupervising and examining banks to ensure their financial healthResponding 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 accountsSavings accountsMoney market deposit accountsCertificates of deposit and other time depositsNegotiable Order of Withdrawal (NOW) accountsCashier’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:
StocksBondsTreasury securitiesCertificates of depositMutual fundsMoney market mutual funds
Coverage Amounts
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 accountsJoint accountsCertain retirement accounts, such as individual retirement arrangements (IRAs)Revocable trust accountsCorporation, partnership, and unincorporated association accountsIrrevocable trust accountsEmployee benefit plan accountsGovernment 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.
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. 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.
