What FDIC, SIPC, NAIC and More Really Do

Updated Oct. 10, 2008.

Given today’s turbulent markets, suddenly understanding what state and government provisions are in place to protect your cash and other assets should an institution go belly-up is foremost on many Americans’ minds.

From a safety perspective, odds are good that your cash is secure -- even if your accounts are with a shaky bank, brokerage or insurer. These government groups step in to protect consumers when financial institutions fail:

What it does: A federal agency that insures deposits at banks and thrifts, the FDIC steps in to protect consumers should a covered institution fail. (Check that yours is insured here.) If it can't sell the deposits to another bank, it pays them itself. In September's takeover of Washington Mutual (WM), for example, it immediately passed operations to JP Morgan Chase (JPM). The bank paid $1.9 billion for all of WaMu’s assets, meaning the FDIC didn’t need to pay out a penny. Should the FDIC take over, consumers can usually access insured funds within one business day. "When the FDIC takes over a bank, they don't even lock the door," says Jean Anne Fox, director of financial services for the Consumer Federation of America, a consumer advocate, "and nobody's lost a penny of insured money."

Covered assets: Checking, savings, CDs and money markets, up to a total of $250,000 per person, per institution. IRAs and select other retirement accounts are protected up to $250,000, trusts up to $250,000 per qualified beneficiary. Use the FDIC's calculator to assess coverage. (Congress increased coverage Oct. 3 from $100,000 per person, per institution as part of the bailout package. The temporary increase is in place through Dec. 31, 2009.)

Limits: The FDIC does not cover securities, mutual funds, annuities, life insurance policies and other nondeposit investment products. On insured products, any amount above the coverage limits is considered uninsured. You might get back that portion if the failed bank has enough assets, but the average rate is just 72 cents on the dollar, says Laura Bruce, senior reporter for Bankrate.com. (When IndyMac folded in July, for example, the government coughed up cash to cover 50% of the bank's uninsured funds.) "You have to wait until they start selling off assets," she says. "That could be years."

What it does: A federal agency that charters and supervises credit unions, the NCUA insures members' deposit accounts via its National Credit Union Share Insurance Fund. It steps in to cover deposits should a federally insured credit union fail. (Check that yours is insured here.)

Covered assets: Coverage is identical to that of the FDIC (see above for details). Use the NCUA's calculator to assess coverage.

Limits: Coverage is identical to that of the FDIC (see above for details).

What it does: Insurance regulators from every state work together through the NAIC to supervise insurers. When an insurer falters financially, the regulating body from its home state steps in to supervise, take over or even liquidate the company, selling its policies to another insurer. "The response would be triggered by the gravity of the situation," says Thomas Sullivan, commissioner for the Connecticut Insurance Department.

Covered assets: Insurers pay policy claims normally under NAIC supervision -- even if the insurer fails. If the failed insurer doesn't have enough assets to pay outstanding claims on unsold policies, the state guarantee fund steps in to pay them using funds from the state's remaining insurers. Coverage varies by state and type of insurance. California, for example, offers up to $500,000 for property and casualty insurance, $250,000 for life insurance death benefits and $200,000 for annuities. Consumers with larger policies lose out on the difference.

Limits: State guarantee fund protections kick in only for carriers licensed through the state. They can also take months to process, says Robert Hunter, director of insurance for the Consumer Federation of America. "The regulator has to ask the insurance companies for money," he says.

What it does: When a protected brokerage fails, the SIPC is the federal agency that steps in to protect consumers by recovering their assets. In September, the SIPC filed paperwork placing Lehman Brothers in liquidation, working to give more than 600,000 customers access to their accounts, which will be transferred to Barclays Capital (BCS). (Check that yours is a member here.) Typically, it transfers accounts to another firm. If necessary, it does also make some accounts that have lost money whole – up to certain limits. It obviously won’t help you out if you own a stock or other security that simply lost money. But if your broker robbed you or the security isn’t valued correctly because the brokerage firm failed, the SIPC steps up. Because the SIPC must slog through the firm's records, it can take up to three months to get your investments back.

Covered assets: The SIPC moves all securities registered in the consumer's name to his or her new brokerage, and divides the firm's assets among accounts to replace qualifying investments. If the failed brokerage doesn't have enough, the SIPC pays out the money itself, covering up to $500,000 in investments per customer, including up to $100,000 for cash.

Limits:  "When you're in a brokerage account, you expect risk," says Bruce. So does the SIPC. The financial worth of your account (and so, your claim) is pegged to a specific time -- the date when SIPC asked a court to put the failed brokerage in liquidation. It does not cover any losses or gains beyond that date. Some investments, including commodities futures and currency, are not covered.