April 2020
Financial Planning

Federal Deposit Insurance Corporation (FDIC) insurance and Securities Investor Protection Corporation (SIPC) offer two different types of coverage that help protect your assets. FDIC insurance and SIPC coverage protect bank and brokerage firm customers, respectively, against the risk of failing financial institutions. They do not protect customers against market losses. Individual assets may be covered under either SIPC or FDIC, but not both. 

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 investors?: 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. 

If you have questions, please contact us.

MARKET UPDATE
COLLEGE AND TAX PLANNING
401(k) ALLOCATION
GRAPHIC OF THE MONTH

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