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Banking 101: SIPC vs FDIC - Understanding the Difference

Written by Katherine Gustafson | Published on 3/8/2019

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

The Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC) are two entities that insure banks and other financial institutions to protect their customers in case of a company’s failure. In planning your deposits and investments, you’ll want to know a bit about these options to ensure you’re getting the coverage you need.

SIPC vs FDIC: The differences between the two

The FDIC is an independent federal agency created after catastrophic bank failures in the early 20th century. The agency is concerned with the potential loss of deposit accounts, such as checking and savings accounts, money market deposit accounts and certificates of deposit.

Customers of banks that carry FDIC insurance are able to recoup up to $250,000 per account holder per insured bank per deposit account type. FDIC insurance does not cover investments in stocks, bonds, mutual funds, life insurance policies, annuities, municipal securities, or money market funds, regardless of whether the bank that holds the investments is FDIC-insured.

The SIPC is not an agency, but a nonprofit membership corporation that was formed by federal statute. Its insurance covers customers of broker-dealers that are members of SIPC. Each customer of member firms can get reimbursed for investments up to $500,000 per customer in case of the member-company’s failure. The insurance does not cover declines in value of investment themselves, but only loss of investments due to failure of the firm that manages them.

Why do they matter to customers?

The FDIC and SIPC are essential not only to individual customers who want to make sure their money is protected in case of an institution failure, but also to maintaining societal confidence in the financial system. Such confidence prevents runs on institutions like the panic that prompted the creation of the FDIC, ensuring a stable and trusted financial sector.

For individual customers, these corporations are important because they provide reassurance that your money will still be available if your institution encounters a major problem.

Customers of banks insured by the FDIC may not even feel any pain at all if the bank that holds their deposits fails. That is because in most cases the FDIC takes the role of selling the deposits and loans owned by the failing institution to a healthy institution. The failing bank’s customers automatically become customers of the healthy bank and can easily carry on with their financial lives without a problem.

What are the risks or costs?

While the costs of these types of insurance may well be passed on to individual customers in some form via the costs of doing business with a given institution, individual account holders and investors do not pay for FDIC and SIPC insurance. The financial institutions carry the insurance, so any account at that institution to which the insurance applies is covered.

A risk of this insurance is that each type only covers up to a certain amount, as discussed above. However, the two types of insurance work differently in how they cover your money. While the FDIC protects the face value of your deposits, the SIPC’s protection is not related to the value of the investment, since that fluctuates with the market. SIPC does not reimburse investors for a decline in the value of their stocks, bonds, and other investments. Instead, the corporation operates by replacing any missing stocks and other securities the investor held when a brokerage firm fails and is liquidated.

SIPC vs FDIC: Which one is best for you?

Whether to look for SIPC vs FDIC coverage depends on whether you are opening a deposit account or investing with a brokerage firm. Considering that the two types of insurance have different purposes exclusive of each other, you won’t be making a choice between these types of coverage.

But you will certainly need to make a choice between financial institutions or broker-dealers that have these types of insurance coverage and those that don’t. It is a mistake to pass up FDIC coverage for your deposits or SIPC coverage for your investments. You’ll be very glad you have it in the rare event of a major problem with your financial institution.

Previous Comments
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  |     |   Comment #1
It may also be beneficial to also discuss NCUA and DIF insurance side by side with FDIC. This also got me thinking about not keeping more than $500,000 in any one brokerage account.
  |     |   Comment #2
One clarification to your wording above. A money market deposit account is FDIC insured if the bank is an FDIC bank. However, I think you meant to say that a money market MUTUAL fund in a brokerage account is not FDIC insured even if it is an FDIC bank.

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