You’re probably familiar with FDIC insurance, which protects you from losing your bank account deposits if your financial institution goes out of business. But you may also receive a limited amount of protection on investment accounts from the Securities Investor Protection Corporation (SIPC) in similar situations.
Like any insurance, there are limitations to your coverage. Most notably, it’s important to know that your investment accounts aren’t protected from market volatility. You’ll still see your account go up or down based on your investment decisions.
So what exactly does SIPC insurance cover? Keep reading to find out what’s protected and, perhaps more importantly, what isn’t protected with this type of insurance.
SIPC Insurance Explained
The Securities Investor Protection Corporation is a non-profit organization that covers at least some of your money in the event the brokerage firm fails. In order to qualify certain deposits for SIPC insurance, you must invest through a registered brokerage firm. Most robo-advisors are also SIPC members, which also qualifies your investments for these protections.
The protection covers up to $500,000, of which $250,000 is limited to cash. In the event a brokerage firm fails, it goes through a liquidation process. During that time, SIPC attempts to replace each investor’s missing stocks and securities as much as possible. The organization claims that 99% of eligible individuals get back their investments through SIPC insurance.
Background and Notable Cases
SIPC was created in 1970 with the passage of the Securities Investor Protection Act (SIPA). At that time, the investor claim limit was just $50,000 with a $20,000 ceiling for cash. The limit increased to $100,000 in 1978 (up to $40,000 for cash) and increased again in 1980 to $500,000 (but with just a $100,000 cash limit). Cash protection increased to the current $250,000 limit in 2010.
Recent major brokerage failings were seen in 2008 with two big cases: the fall of Lehman Brothers and the Ponzi scheme orchestrated by Bernie Madoff. SIPC distributed 100% of claims to Lehman Brothers customers, while 63% of Madoff customer claims were fulfilled. However, it took several years to complete the process.
What’s Covered and What’s Not Covered
Understanding the rules of SIPC insurance helps clarify what your coverage actually looks like. In the event your brokerage firms ends up going out of business, you’ll know exactly how you can file to get back your eligible funds.
Coverage Details
As long as you invest in a brokerage firm that is a SIPC member, you should be able to qualify for SIPC insurance eligibility. It also doesn’t matter whether or not you’re a U.S. citizen. This should be part of your due diligence as you pick your brokerage firm. If you’re already investing, double check to make sure the company is indeed SIPC-insured.
Multiple accounts may be covered by SIPC insurance. When eligible, it’s known as “separate capacity.” This feature enables you to take advantage of the SIPC limits for each individual type of account, rather than having to combine all of your accounts under the $500,000 limit.
Examples of separate capacity accounts include:
- Individual accounts
- Joint accounts
- Corporation accounts
- Trust accounts created under state law
- IRAs
- Roth IRAs
- Accounts held by an executor for an estate and/or a guardian for a minor
Multiple accounts that are considered within the “same capacity” are combined for coverage limits. As an example, if you have an individual taxable investment account, a separate joint taxable investment account, and a traditional IRA, SIPC insurance would cover up to $1,500,000 in securities and cash (including a $750,000 limit on the cash). That’s because each of those separate capacity accounts qualify individually for the $500,000 coverage.
But if you have two individual brokerage accounts, they are only covered for $500,000 total because they’re considered within the same capacity.
Eligible Securities
The SIPC lists a variety of securities eligible for insurance protection. These include (but are not limited to) the following:
- Notes
- Stocks (including Treasury stocks)
- Bonds (including debentures)
- Evidence of indebtedness
- Collateral trust certificates, preorganization certificates, or subscriptions
- Transferable shares
- Voting trust certificates
- Certificates of deposit
Note that money market accounts are also treated as securities rather than cash for the purposes of determining SIPC insurance coverage limits.
Not Covered
Remember, SIPC insurance doesn’t cover losses due to market fluctuations. If you lose $500,000 (or any amount) in an account because the stock market crashed, you won’t receive any compensation — that’s simply the risk of investing. And while SIPC insurance does cover the failure of a brokerage, it doesn’t protect against a firm giving bad investment advice.
In short, you’re responsible for how you invest your money, but not necessarily for the managerial failings of the company.
Additionally, SIPC does not protect cash held as currency, futures, and commodities. REITs are only covered if they’re registered with the SEC, otherwise, they’re not protected by SIPC.
Also important to note is that joint accounts are counted as a single account in regards to insurance limits. The covered amount doesn’t double just because there are two account owners.
Claims Process
In order to qualify for insurance coverage, you must file a claim with SIPC once the brokerage firm has failed. There may be time limits for filing, so pay careful attention if you find yourself in this situation.
SIPC lists open cases online, along with the filing deadlines for each one. You can submit your claim form electronically or fill out the details and mail it in. Act quickly, otherwise, you might lose the opportunity to file a claim.
When filing, you must include information on the cash and securities that were held in your account, along with any kind of supporting paperwork such as brokerage statements. After your claim is received, it’s reviewed by the case’s trustee. The value of any securities is usually determined from the date the liquidity process began.
Once your claim is reviewed, expect to receive a determination letter explaining why your claim was either approved or denied. If you disagree with the trustee’s findings, you have 30 days to object to the court. Assuming your claim is approved, you can sign and submit the required forms to receive payment from SIPC.
Understand the claims process, but also know that it’s a rare case that a brokerage firm enters the liquidation process. In fact, in the 42 years since SIPC was established, only 324 cases have occurred. That’s an average of less than eight a year.
Alternatives to SIPC Insurance
While SIPC covers qualified investment accounts in the event of a brokerage failure, there are other types of insurance that work to protect your deposits elsewhere. Here’s a quick rundown of other types of insurance that bolster your overall financial security. They don’t act in place of SIPC insurance but create a more secure environment for your deposit accounts at traditional banks or credit unions.
FDIC Insurance
SIPC is very different from FDIC insurance. While SIPC protects covered assets during a brokerage firm’s liquidation, FDIC insurance protects certain deposits when a bank goes under. Just like SIPC insurance, your bank must be FDIC-insured in order to take advantage of the protection.
Your money held in a bank is covered up to $250,000 and includes both your principal balance as well as any interest you accrued in the accounts. Only deposit accounts are eligible for FDIC insurance, including checking and savings accounts. Joint accounts get doubled protection up to $500,000. IRAs may also qualify, but only if they’re held as deposit accounts, not as investment products.
NCUA Share Insurance Fund
Instead of offering checking and savings accounts, credit unions offer share accounts, with different options available for checking and savings. Like FDIC insurance, you receive protection on accounts up to $250,000. IRA and KEOGH retirement accounts are protected separately.
Whether you’re putting your money into cash accounts or investment accounts, make sure each institution maintains the proper insurance coverage so that your money is protected as much as possible in a worst-case scenario. Most large financial institutions are FDIC-insured, but it’s always worth double-checking, especially if you prefer to bank with smaller, local institutions.
The Bottom Line
SIPC insurance doesn’t protect you from investments gone wrong. Instead, it safeguards your money in case you end up investing with a poorly managed company that enters into bankruptcy or some other type of financial distress. That’s why it’s so important to know not just the benefits of SIPC insurance, but the limitations as well.
In an ideal world, you’ll never need to take advantage of this added layer of protection. But if you do, SIPC has a pretty strong track record of honoring qualifying claims from investment customers.
