Congress developed separate organizations called the Securities Investor Protection Corporation (SIPC) and the Federal Deposit Insurance Corporation (FDIC) to protect consumers if a bank or brokerage firm fails due to economic situations. When you decide between a brokerage or a bank to hold your money, you should understand its advantages and drawbacks.
We closely examine SIPC vs. FDIC: their differences, what financial items are covered, how the refund procedure works, and which type of insurance is better when you hold cash.
What Is FDIC Insurance?
The Federal Deposit Insurance Corporation (FDIC) is a U.S. government agency that protects FDIC-insured banks and savings association depositors against the loss of their insured deposits in the case of a failure.
How does it work?
When an FDIC-insured bank or savings association fails, depositors will be reimbursed up to the insured balance limit in their accounts, per depositor for each insured category. The FDIC will contact you with any inquiries without needing to submit a claim from your end. Consumers can get a check for the money in the mail or a new account with insured funds at a new FDIC-insured bank.
Financial products FDIC insurance covers
FDIC insurance safeguards money kept in FDIC-insured banks and other savings associations. Typically covered up to insured limits are the following products:
- Checking accounts
- Savings accounts
- Money markets account
- Certain prepaid cards
- Certificates of deposit (CDs)
How do you confirm whether your bank is FDIC-insured?
Nearly all banks and savings associations in the United States have FDIC insurance, and they usually display the FDIC logo on their websites, in marketing resources, and at branches when appropriate. It’s also possible to go through the FDIC database and make sure that your bank is insured.
Credit unions are insured, though not by the FDIC. They offer consumers federal insurance through the National Credit Union Administration (NCUA) up to specified limits.
What Is SIPC Insurance?
The Securities Investor Protection Act of 1970 developed the Securities Investor Protection Corporation. It is a nonprofit organization of which most brokerage firms are required to be members. If a member company collapses, the SIPC works with court-appointed trustees to recover cash and securities from client accounts when the brokerage firm liquidation starts and to distribute securities and other investments back to individual investors claiming a loss.
How does it work?
Suppose a SIPC-member brokerage company finds itself in a financial crisis or fails. In that case, the SIPC safeguards the securities and cash in the accounts while supervising the liquidation of closing member companies. You have to claim by the deadline if you seek payment. From there, following examination of your claim, the Trustee will mail a “determination letter” declaring whether your claim is approved or denied. You will get cash or a delivery of securities if your claim is approved and you agree.
The SIPC replaces the securities that were in your account. However, the value of the securities could vary depending on the present market situation. For instance, if the brokerage company fails and you have five shares of a stock valued at $500, the SIPC may replace the five shares, but their value may vary depending on changes in the market value of those securities.
Financial products SIPC insurance covers
The securities and cash kept in the brokerage accounts are secured by the SIPC. The investment types that are mostly secured by SIPC insurance up to insurable limits are as follows:
- Cash
- Stocks
- Bondings
- Treasury securities
- Mutual Funds
- Transferable interests kept in brokerage accounts
- Any other investment commonly considered a security
How do you confirm whether your brokerage is SPIC-insured?
With some exceptions, all registered brokers or dealers must be members of SIPC. Like FDIC members, SIPC members must show their affiliation in ads, online, and, if relevant, in person. Review the list of over 3,500 members to verify that your brokerage company is insured.
What is the Difference Between SIPC and FDIC?
Although both the FDIC and the SIPC serve to protect consumer assets, there are some rather important distinctions. One of the most significant distinctions is that the SIPC is a nonprofit organization trying to recover consumers’ lost cash and securities when a brokerage firm goes bankrupt. At the same time, the FDIC is an independent agency inside the U.S. government that offers insurance that protects assets held in banks or savings associations.
SIPC’s narrow and unique emphasis is restoring client cash and assets left by bankrupt or financially challenged brokerage companies. Unlike the FDIC, which guarantees depositors of insured banks and investigates claims, the SIPC cannot probe complaints or control its members.
While FDIC insurance protects assets in banks or savings associations, SIPC safeguards consumer holdings in brokerage accounts. Here is information about both kinds of insurance.
SIPC
- Accounts Covered: If a SIPC-member brokerage business fails, the SIPC seeks to reimburse customer cash and securities—stocks, bonds, and mutual funds, among other things—in the accounts.
- Maximum Coverage: The SIPC covers up to $500,000 total, including $250,000 in cash.
- Cash Value Protection: This doesn’t protect the value of any security and doesn’t cover regular losses, bad investment advice, or the drop in the value of your assets.
- Applicability: The coverage comes in handy when a brokerage company closes.
- Claim Process: Complete a form to submit a claim with the SIPC by the deadline.
FDIC
- Accounts Covered: If a bank insured by the FDIC collapses, the FDIC reimburses insurance to depositors up to the maximum amount allowed, including money in any deposit account.
- Maximum Coverage: Each depositor is insured up to $250,000 for every ownership type.
- Cash Value Protection: Keeps the value of assets in bank accounts secure, up to the insured limit.
- Applicability: The insurance covers you should a bank or savings association fail.
- Claim Process: The refund procedure is automated; typically, you will get the money in a few days.
FDIC or SIPC: Which Is the Best Place for Your Cash?
SIPC and FDIC insurance protect in different ways; therefore, neither is better. Both will guarantee that your account or investments are safe within the insurance limits they provide. Just ensure that your institution is a member of one of these entities.
FDIC-insured institutions are a better choice if you have cash because your money is usually repaid right after a bank’s collapse without any claim from you. In contrast, the SIPC process can be complicated and may take a lot of time, requiring you to file a claim and monitor communications. Thus, an FDIC-insured checking or high-yield savings account is a safe bet for cash security.
