Is There Insurance Against Losing Investments?
Money Girl explains what systems are in place to keep your investments safe, up to certain limits.
Laura Adams, MBA
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Is There Insurance Against Losing Investments?
One of the most uncomfortable things about investing is that it involves risk. We all want to make money, but no one likes the idea of potentially losing some, or all of it.
However, there are limited protections that investors have against loss. In this episode I’ll answer a listener question and tell you what systems are in place to keep your investments safe, up to certain limits.
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A Money Girl reader named Julie asks:
“I’m looking for insurance to protect my investments from losing value. I’ve heard that the FDIC protects your money when a bank goes out of business. Is there something similar for retirement accounts?”
What Is the FDIC?
Before we talk about investments, let’s briefly review the FDIC coverage that Julie mentioned in her question.
FDIC is short for Federal Deposit Insurance Corporation, which is an independent agency of the federal government. It was created by Congress in 1933 as a response to thousands of bank failures that occurred during the Depression in the late 1920s and early 1930s.
The FDIC isn’t funded by taxpayers, but by premiums that banks pay. An institution that has FDIC insurance covers deposits up to $250,000 per depositor. This coverage applies to each ownership account type you might have, such as single ownership (in just your name), jointly-owned accounts, and trust accounts.
However, the FDIC only insures deposits, such as money in checking, money market deposit accounts, and CDs. It never insures investments like stocks, bonds, mutual funds, or annuities—even if you buy them through an FDIC-insured institution.
Can You Insure Investments Against Loss?
Although FDIC-insured bank customers can rest easy knowing that their deposits will be returned up to certain limits no matter why an institution fails, there’s no similar insurance for investors. However, you can get some relief if your stock broker or mutual fund family closes due to financial trouble and your money is missing.
Continue reading to find out about how the SIPC can help protect your investments…..
What Is the SIPC?
The agency that comes to the rescue when your brokerage goes bust is called the Securities Investor Protection Corporation or SIPC. It’s a nonprofit corporation that was created by Congress in 1970 to cover the losses of investors, within certain limits.
The SIPC works to return your missing cash, stock, or other securities, when your brokerage goes out of business and still owes you money. Their website (sipc.org) says that since December 2008, they’ve returned $9.32 billion to the victims of Ponzi schemer Bernie Madoff. This is more than 53% of the approximately $17.5 billion that went missing.
The SIPC acts as the trustee or works with an independent court-appointed trustee to recover investor funds. They oversee the recovery process and ensure that customer claims are paid fairly, on a pro-rata basis.
If they can’t fully satisfy all investor claims for missing money, the SIPC has a reserve account that can be used to make up the difference, up to certain limits. The reserve is funded by member brokers. It can be used to supplement each investor’s losses for up to $500,000, which includes a maximum of $250,000 for cash claims.
But the SIPC doesn’t protect every type of investment. They generally don’t work to return futures contracts, limited partnerships, or annuities that aren’t registered with the U.S. Securities and Exchange Commission (SEC). Nor do they ever cover loss that’s the result of market volatility.
Who Offers SIPC Protection?
When you choose an investment on your own, or through a financial planner or stockbroker, make sure that the company offers SIPC coverage. Only brokerages that are members of the SIPC can offer its protection to customers.
The SIPC website has a member database you can use to verify that your investment company is covered.
The SIPC helps investors when their money is stolen if their brokerage goes out of business—but they don’t bail out investors from bad investments.
The SIPC Is Not Like the FDIC
To sum up, the SIPC does not work like the FDIC because it does not insure invested funds. The SIPC helps investors when their money is stolen if their brokerage goes out of business—but they don’t bail out investors from bad investments.
There simply is no guarantee against losses or fraud in the investment marketplace. Different types of investments come with different amounts of risk. To be an investor means you understand these inherent risks and are willing to take the gains with the losses.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.