Money Girl

FDIC and SIPC Rules–How Much Money Do They Protect?

Episode Summary

Today’s show was inspired by the recent collapse of several banks with significant exposure to the technology sector.

Episode Notes

Laura reviews what the FDIC does for depositors and how to make sure your money is always protected. You’ll learn how it compares to SIPC protection on certain investments.

Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.

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Episode Transcription

Hey, friends, and welcome back to the Money Girl Podcast–I appreciate you downloading the show! I'm Laura Adams, an award-winning finance author who's been bringing you personal finance and small business tips every week since 2008. I also work with select brands doing on-camera and writing work as a PR spokesperson and consumer advocate.

Here on the show, I cover a wide range of personal and small business money topics, like building credit, dealing with debt, investing for retirement, owning real estate, paying taxes, having the right insurance, money management strategies, and lots more.

So, if you're ready for more knowledge, resources, and motivation to manage money the best way possible and create a richer life, you are in the right place.

Be sure to subscribe to the show and participate by sending me your money questions or comments. You can leave a message 24/7 on our voicemail line at 302-364-0308. And is my personal site where you can use my contact page to email me and learn more about my work, books, and money courses.

Today’s show was inspired by the recent collapse of several banks with significant exposure to the technology sector, namely Silicon Valley Bank (SVB) and Signature Bank. SVB’s downfall began when they announced they were looking to raise capital. That set off alarm bells for their customers, which began a chain reaction of depositors pulling funds out of the bank.

The problem is that SVB was heavily invested in bonds that declined in value due to the Fed’s interest rate hikes in 2022. When interest rates go up, bond prices go down. So, as customers moved their money out of the bank, SVB suddenly had to sell the bonds at steep losses to fund the withdrawals.

As SVB ran out of money to pay their depositors, they got seized by FDIC regulators.

The Biden administration made all depositors whole by covering their funds to avoid additional potential banking problems.

SVB was the second-largest bank failure ever in the U.S. It took me back to 2008 when I was starting this podcast, and we saw the biggest-ever bank collapse of Washington Mutual during that financial crisis.

At the time, everyone was panicked about FDIC limits, so I did some podcasts explaining it. Since that was about 15 years ago, I thought it was time to revisit the topic. We’ll review what the FDIC does and how to make sure your money is always protected. Plus, I’ll review how it compares to SIPC protection on certain investments.

What is FDIC insurance?

FDIC stands for the Federal Deposit Insurance Corporation, an independent agency created by Congress in 1933 to keep our banks healthy and maintain Americans’ confidence in our financial system. It was established as a response to thousands of bank failures during the Depression in the late 1920s and early 1930s.

FDIC insurance only applies to deposits at member banks, which pay premiums to the FDIC. It’s backed by the “full faith and credit” of the federal government to insure bank deposits, supervise banking activity, advocate for consumers, and manage receiverships when a covered institution goes out of business.

FDIC covers checking accounts, savings, money market deposit accounts, and certificates of deposit (CDs). Note that credit unions that belong to the NCUA or National Credit Union Administration get similar protections. So, it’s critical that you only put your money in insured institutions.

Be aware that neither FDIC nor NCUA coverage insures any financial product or investment like stocks, bonds, mutual funds, exchange-traded funds, cryptocurrency, annuities, or life insurance–even if you buy them from an insured institution.

While there is a limited amount of SIPC (Securities Investor Protection Corporation) coverage for investments, it’s very different from FDIC or NCUA protections. I’ll touch on what SIPC covers at the end of the show.

How does FDIC insurance work?

You've probably heard that when you deposit money in an FDIC-insured bank, you get coverage up to $250,000. Since there's some nuance to that limit, I'll explain how it works. I want you to understand that the $250,000 coverage applies per account owner, account type, and institution. Stay with me, and I'll explain.

Firstly, since you get separate coverage for deposits at different banks, it’s wise to spread out your money when you exceed the limit for an account type. There are many different bank account types, but some of the most common include single, joint, trust, and retirement.

That means you can qualify for more than $250,000 if you have different account types, such as single ownership in your name only and joint ownership with a spouse or partner.

For instance, let’s say you have a checking and savings account in your name only, which are single ownership accounts. You could have any combination of $250,000 in them, such as $25,000 in checking and $225,000 in savings, and be covered.

If you have joint accounts, each co-owner gets insurance up to $250,000. So, you and a spouse would receive up to $500,000 for your shared accounts. In addition, if you open your own individual savings separately, it would have $250,000 of coverage on top of your joint account coverage.

RELATED: Kids Bank Accounts Parents Should Consider 

Can you receive higher FDIC limits?

In some situations, you might receive higher FDIC insurance limits. For instance, if you have a cash account with a brokerage firm, they may allocate your funds across multiple banks and offer more coverage than an individual bank. That’s the case with my brokerage, Betterment, which recently increased FDIC coverage to $2 million for single-ownership accounts and $4 million for joint accounts.

LISTEN: Should I Use a High-Yield CD for My Savings

What is SIPC insurance?

Although FDIC-insured bank customers can rest easy knowing deposits are insured up to limits no matter why an institution fails, there’s no similar insurance for investors. However, the SIPC gives you some relief if your stock broker or mutual fund family closes due to financial trouble and your money is missing.

The SIPC is a nonprofit corporation created by Congress in 1970 to cover investors’ losses up to certain limits. It acts as a trustee or works with an independent court-appointed trustee to recover missing cash, stock, or other securities if your brokerage goes out of business and still owes you money. The SIPC oversees the recovery process to ensure customer claims are paid fairly on a pro-rata basis. 

If the SIPC can't fully satisfy all investors' claims, they have a reserve account funded by member brokers that can get used to make up the difference, up to certain limits. The reserve can supplement each investor's losses for up to $500,000, which includes a maximum of $250,000 for cash claims. 

Be aware that the SIPC doesn’t protect every type of investment. They generally don’t work to return funds for futures contracts, limited partnerships, cryptocurrency, or fixed annuity contracts that aren’t registered with the U.S. Securities and Exchange Commission (SEC). Nor do they ever cover losses due to market volatility.

So, only do business with SIPC member brokerages. You can visit the SIPC website to search for companies in their member database

To sum up, the SIPC differs from the FDIC because it does not insure invested funds. The SIPC helps investors when their money gets stolen if their brokerage goes out of business—but they don't bail out investors from bad investments or market volatility.

There's no guarantee or insurance against losses or fraud in any investment marketplace. As you know, different types of investments come with varying amounts of risk. Being an investor means understanding these inherent risks and being willing to take the gains with the losses.

RELATED: 7 Smart Ways to Invest Extra Money

That's all for now. I'll talk to you next week. Until then, here’s to living a richer life.