Growing your wealth is important. So is safeguarding it. This is where insurance for your financial accounts and assets comes in.
By understanding the insurance coverage provided by FDIC (Federal Deposit Insurance Corporation) or SIPC (Securities Investor Protection Corporation), you can rest easier knowing what is (or isn't) covered at an institutional level.
These two main types of insurance coverage have different specific purposes and coverage limits. By knowing the difference between how FDIC and SIPC protect your wealth, these can complement and strengthen your personal coverage and tie into your existing wealth management strategies.
Now, let's look at how these two types of coverage differ and how they protect your financial assets by answering these critical questions: What does FDIC Cover? What does SIPC Cover?
FDIC Coverage and Its Definition
Created in the wake of bank failures during the Great Depression era, FDIC insurance is a federal guarantee provided by the Federal Deposit Insurance Corporation.
This government agency was created to assure you that if your banking institution or savings association goes under (if the bank fails), you will not lose everything.
This might sound like an unlimited safety net, but it doesn't cover everything and not every institution has this coverage.
The FDIC covers funds in deposit accounts. Generally, it protects your financial assets when they are deposited at an insured banking institution. This includes checking accounts, savings accounts, money market deposit accounts, or certificates of deposit.
However, it does not protect stocks, bonds, money market mutual funds, life insurance policies, municipal securities, or safe deposit boxes, even if they're from the same financial institution offering the previously mentioned covered services.
The FDIC insurance limit for FDIC coverage at any of the FDIC-insured banks is $250,000 per depositor per bank. Because the guideline is per depositor, this includes the total amount you have deposited in the covered account types at an institution.
However, strategies to maximize how this coverage applies to you include opening joint accounts or single accounts across different member banks or credit unions under the NCUA (National Credit Union Association).
That said, if you are carrying significant enough cash that you are worried about this and splitting deposits only for the coverage, it's likely time to speak with a dedicated wealth manager to align on a cash position that makes sense for your needs.
FDIC insurance coverage offers a safety net for investors with cash assets in traditional bank accounts. It ensures you will not lose your hard-earned money if the financial institution fails. But remember, its limitations only extend to cash products, setting it apart from SIPC coverage, which we will discuss next.
Takeaways:
- Federal insurance for individuals protecting assets deposited at covered institutions
- Maximum coverage of $250,000 per depositor, per bank.
- Does not protect stocks, bonds, money market mutual funds, safety deposit boxes.
SIPC Coverage and Its Definition
Like the FDIC insures your bank deposits, SIPC insurance, provided by the Securities Investor Protection Corporation, secures your investment account.
It doesn't guarantee the market value of your securities but protects them if the brokerage firm fails. This means your stocks, bonds, or other types of securities won't "disappear" even if your broker-dealer were to become insolvent (an exceedingly rare event).
SIPC coverage covers up to $500,000 in total assets, including a $250,000 limit for cash. SIPC insurance doesn't cover some scenarios involving currency investments, commodities, futures contracts, investment contracts, and fixed annuities. Proper knowledge of what SIPC insurance covers can clarify unanticipated vulnerability areas in your portfolio.
Takeaways:
- Coverage for your investment portfolio if a broker or custodian were to become insolvent.
- Covers up to $500,000 in assets, including $250,000 in cash.
- Some exclusions like foreign currencies or commodities.
General Custodian Coverages
Certain brokerage accounts like those from Schwab or Fidelity might have additional coverage. While this coverage is not federally insured or mandated, it's protected under the respective firm's policy, ensuring your investments are secure even if they face liquidation or significant financial setbacks.
Most brokerage firms provide you with an extra insurance policy over their SIPC protection, at times for your entire portfolio. This supportive security blanket can be beneficial for investors with large account balances.
However, different firms' policies stipulate other conditions. So, ensure you understand the different protection these custodians offer before putting your money into their hands, particularly if they aren't a major player.
In this case, it's best to consult a financial advisor so you'll have access to expert advice supported by their years of experience in the industry.
FDIC insurance covers your bank deposits, while SIPC safeguards your stocks at brokerage firms. The former protects against bank failures; the latter guards against brokerage firm collapse.
Specialty custodian coverage can be an added layer, particularly for those with large investment holdings to limit your personal risk to institutional failures, although everyone accepts general market risk.
As an investor, understanding these insurance policies may help lessen some degree of investment insecurity. You must make sound decisions about how, where, and when to trust or with whom to trust your financial investments. Remember, though, that diversifying investments is also another way to safeguard your assets against potential risk.
Factor FDIC & SIPC Coverage into Your Plan with Plancorp
By exploring and implementing comprehensive financial planning methods and consulting a professional wealth manager like Plancorp, you can make sure that your financial plan is appropriately using federally-mandated and broker-based coverages along the way.
Taking steps for broader protection affords peace of mind, allowing you to focus on what truly matters. Let us guide you if you need help understanding insurance like FDIC or SIPC. Protecting your assets doesn't mean restricting yourself but nurturing all the facets of your financial journey.
Contact us at Plancorp to maximize your FDIC and SIPC coverage while complementing it with comprehensive wealth management strategies.
