Insuring Your Investments: FDIC & SIPC
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Most banks indicate in their advertisements and letterheads that they are members of the FDIC. You may also notice that securities brokers and investment advisers advertise their membership in the SIPC. What do these memberships mean?
FEDERAL DEPOSIT INSURANCE CORPORATION
The FDIC’s full name is the Federal Deposit Insurance Corporation, established by Congress in 1933 to make American bank deposits safer. The insurance protects depositors’ funds from a bank’s financial failure. If a bank becomes “bankrupt,” the FDIC will pay insured deposits as soon as possible after the banking institution is closed by its chartering authority.
The standard FDIC coverage insures bank deposits, such as checking accounts, savings accounts, money market deposit accounts, negotiable order of withdrawal (NOW) accounts, and certificates of deposit up to $250,000 per depositor, per insured bank, in each account ownership category. According to the FDIC website, the account ownership categories are:
- Irrevocable trust accounts
- Joint accounts
- Certain retirement accounts
- Revocable trust accounts
- Employee benefit plan accounts
- Single accounts
- Unincorporated association accounts
- Government accounts
- Partnership accounts
- Corporate accounts
A depositor could deposit up to $250,000 in each of several banks and each deposit would be separately insured. Also, depositors can open accounts under various names and account relationships and cause each account to be a separately insured account within a single banking institution. For example, a husband and wife could have a joint checking account that would serve as one account and each of them could have separate accounts in their individual names that would count as additional insured accounts. Furthermore, if the husband and wife have engaged in estate planning, they can set up trusts and cause the trusts to be owners of deposit accounts also.
The establishment of FDIC insured accounts is an important estate planning matter. You should always consult your estate planning attorney before shuffling accounts to cause them to be FDIC insured. Errors in opening accounts can create tremendous confusion and require expensive estate plan corrections.
The FDIC website indicates that the FDIC does not cover:
- Stock investments
- Bond investments
- Mutual funds
- Life insurance policies
- Annuities
- Municipal securities
- Safe deposit boxes or their contents
- U.S. Treasury bills, bonds or notes
SECURITIES INVESTOR PROTECTION CORPORATION
The Securities Investor Protection Corporation (the “SIPC”) was created by Congress in 1970 to protect money that investors 
have entrusted to securities dealers. The SIPC is not the FDIC and a securities investor cannot expect the same kind of protection that the FDIC provides. SIPC helps investors recover money, stocks, or other securities that are lost or stolen by a broker if the broker fails or otherwise goes out of business.
SIPC’s website says, “In a liquidation under the Securities Investor Protection Act, SIPC and a court-appointed Trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only).”
Investors should not expect that SIPC protects their investments from market losses. SIPC does not protect investments from the kinds of losses that occur when stock or bond prices fall and reduce investment values.
COMPARISON OF FDIC AND SIPC
A comparison of the protections provided by FDIC and SIPC may help explain their differences. If a depositor invests $250,000 in certificates of deposit in an FDIC-insured bank account, the depositor will receive the entire $250,000 even if the bank runs out of money and is forced to close. If an investor invests $1,250,000 in stocks, bonds, or mutual funds through a local securities broker and 50% of the securities of the broker turned up missing, the investor will receive $500,000 worth of securities or cash from the SIPC; $625,000 worth of securities (50% of $1,250,000); and have a creditor claim against the securities broker for the remaining $125,000 worth of securities.
KNOWLEDGE IS PROTECTION
The FDIC and SIPC websites provide wonderful information to help explain their respective programs. The FDIC website homepage is located at: www.fdic.gov. The SIPC website homepage is located at www.sipc.org. Both websites offer information that prudent investors can use to make better investment decisions. Remember, investing in any investment involves risk and a diverse investment mixture is usually the safest plan.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators; and he was the 2014-15 President of the Indiana State Bar Association.
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