Just like the FDIC, SIPC insurance does not protect someone against making bad investment choices or even investment fraud. Instead, it protects investors against the firm “disappearing” with their money because of something like a bankruptcy.
It is important to note that money market accounts and other “just like cash” investments such as Auction Rate Securities, are not protected by SIPC for a loss in their value. These accounts are only protected against an investor's assets getting consumed by a member firm's failure.
Just like FDIC insurance, SIPC protection has its financial limits. However, at $500,000 per individual, it protects substantially more assets than FDIC insurance. Of this $500,000 per person, only a maximum of $100,000 may be in cash.
A married couple or any other type of joint account owners would each be protected individually under SIPC insurance. This essentially doubles the coverage, protecting the owners of a joint account up to $1,000,000 (with a maximum of $200,000 in cash).
But remember, SIPC insurance is only backed by other Wall Street firms, not by the U.S. government. So even though it protects you for a larger amount, it may be of zero help if SIPC runs out of bailout funds. The size of the SIPC insurance pool is currently about one billion dollars, which is not that much in Wall Street terms.
Additionally, many Wall Street firms have begun to purchase “supplemental coverage” over the last couple of decades. In essence, these firms go to an insurance company, pay a premium, and buy additional insurance to protect you account. Hence, many of these firms will say something kind of sneaky like “your account is protected up to $100 million dollars!” That of course breaks down to $500,000 in SIPC insurance and $99.5 million in supplemental insurance, which is only as good as the insurance company that issued it.
It is important to note that SIPC insurance coverage also does not include investments in commodities, futures contracts, currencies, or limited partnerships. This will not be a concern for most parents investing for college though, since most college accounts do not allow these types of investments anyway.
For more information on SIPC insurance coverage, as well as a list of firms that participate, visit the SIPC website at www.SIPC.org.
