SIPC vs. FDIC: Understanding the Difference

Understanding the protections that are in place for your hard-earned money is important. Both the Federal Deposit Insurance Corp. (FDIC) and the Securities Investor Protection Corp. (SIPC) provide insurance to safeguard assets held within financial institutions, protecting consumers if a bank or brokerage firm fails.

However, there are some key differences between these two insurance offerings. Here’s what to know about SIPC versus FDIC insurance, including what each covers, limits and tips to secure your accounts.

What is FDIC insurance?

FDIC insurance is a cornerstone of consumer protection in the U.S. banking system. Created in 1933 after catastrophic bank failures amid the Great Depression, the FDIC is an independent federal agency that protects your money at FDIC-insured banks if they were to fail.

If an FDIC-insured bank closes, FDIC insurance coverage pays up to the insurance limit within a few days after a bank closing. This promotes stability and public confidence, preventing bank runs and panics that can destabilize the entire financial system. 

What does FDIC insurance cover? 

FDIC insurance covers multiple types of deposit accounts at FDIC-insured banks, including checking accounts, savings accounts, money market accounts (MMAs) and certificates of deposit (CDs). With interest-earning accounts, FDIC insurance covers both the principal balance and any accrued interest up to a certain limit. 

The standard coverage limit is $250,000 per depositor for each insured category at a single FDIC-insured bank. 

How does FDIC insurance work? 

In the event of bank failure, two things typically happen: 

• Your account will be transferred seamlessly to a new one at another insured bank, in an amount equal to the insured amount at the failed bank.
• The FDIC will pay you directly in the amount of your insured balance. 

Either scenario is likely to happen within a few days after a bank closure. The FDIC uses bank records to determine the insured amount and issues payments automatically. 

What is SIPC insurance? 

The SIPC is a nonprofit membership corporation that was formed by federal statute. Like the FDIC, the SIPC protects consumers from financial losses. The main difference is that the SIPC insures cash and securities held by customers at brokerage firms. 

SIPC insurance protects investors from the potential loss of their securities due to a brokerage firm’s bankruptcy or financial distress. In addition to safeguarding your investments, SIPC insurance helps maintain investor confidence. 

What does SIPC insurance cover?

SIPC coverage applies to securities such as stocks, bonds and mutual funds held in brokerage accounts at SIPC-member firms. SIPC insurance typically covers up to $500,000 per customer, including a maximum of $250,000 for cash claims. This means, if your brokerage firm fails, the SIPC will attempt to return your securities and cash up to these limits. 

Note that the SIPC does not protect against market losses. If the value of your investments declines, SIPC insurance will not reimburse you. It covers only the loss of assets due to the failure of the brokerage firm itself. 

SIPC insurance also does not apply to certain types of investments, including cryptocurrency and fixed annuity contracts. 

How does SIPC insurance work?

If an SIPC-member brokerage firm fails, the SIPC will initiate a liquidation process. Here’s how it typically works: 

• Distribution of assets: First, the SIPC will work to return customer securities and cash that are readily available in the firm’s accounts. 
• Claims process: If your assets are missing and cannot be returned, you’ll need to file a claim with the SIPC. Claims can be filed electronically or by mailing a completed and signed form to a court-appointed trustee. Keep in mind that claims will need to be filed before the deadline or you risk losing your investments. 
• Determination letter: Whether your claim is accepted or denied, you’ll receive a determination letter detailing the decision. You also have 30 days to dispute the decision with the court. 
• Reimbursement: If the trustee determines that your claim is valid, you will receive either a cash payment or a delivery of securities up to the limits set by the SIPC. When possible, the SIPC prefers to provide securities to put consumers in the same position they were in before their brokerage firm failed. 

The amount of time it takes to navigate the claims process and receive reimbursement depends largely on the brokerage firm. If the firm kept detailed records, reimbursement of at least some assets will typically occur within one to three months. But if the brokerage firm’s records are inaccurate, or if fraud was involved, this process could be delayed by several months. 

SIPC vs. FDIC: How they compare 

Now that you have a better understanding of FDIC and SIPC insurance, here’s a breakdown of how the two compare. 

SIPC vs. FDIC insurance: Which is best for you? 

While FDIC insurance backs deposit accounts, SIPC insurance protects investments with brokerage firms. This means you won’t be choosing between these two insurance types. Rather, the insurance you need will depend on the types of accounts you have. 

To take advantage of these crucial protections, you’ll need to prioritize working with an FDIC-insured bank or a brokerage firm backed by the SIPC. To check whether a financial institution is insured by either of these entities, you can visit the institution’s website, search FDIC and SIPC databases or contact the bank or firm directly. 

Frequently asked questions

What is the difference between SIPC and FDIC insurance?

FDIC insurance protects bank deposits, such as checking and savings accounts, while SIPC insurance safeguards securities in brokerage accounts, such as stocks and bonds. Essentially, the FDIC covers bank failures, and the SIPC covers brokerage firm failures. 

How much does FDIC and SIPC insurance cost? 

If you have an account at a bank or a brokerage firm, you do not pay directly for FDIC or SIPC insurance. However, the costs of FDIC insurance may be passed on to individual customers. The cost for consumers may come in the form of fees or lower rates on deposit accounts. 

Are credit unions FDIC-insured? 

No. Credit unions are generally insured by a separate entity: the National Credit Union Administration (NCUA). As with the FDIC, the NCUA typically insures your deposits for up to $250,000.

How do I know if my bank is FDIC-insured? 

You can check whether a bank is insured by the FDIC by looking for the FDIC logo on the bank’s website or mobile app, using the FDIC’s BankFind Suite tool, or directly asking a bank representative.