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How Uninsured Certificates of Deposit Work

By Rebecca Lake · September 18, 2022 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How Uninsured Certificates of Deposit Work

While most CDs are federally insured, an uninsured certificate of deposit is one that’s not covered by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA).

The FDIC and the NCUA provide insurance protection to consumers at banks and credit unions, respectively, up to $250,000.

Investing in an uninsured certificate of deposit could make sense if you’re hoping to earn a higher return for your money. But it’s important to understand the potential risks involved with uninsured CDs.

What Is an Uninsured Certificate of Deposit?

An uninsured CD is any CD that is not covered by depositor’s insurance. Depositor’s insurance protects consumers against financial losses in the rare event that a bank or credit union fails. The FDIC covers accounts at insured banks; the NCUA covers accounts at insured credit unions.

Types of Uninsured CDs

There are different kinds of uninsured certificates of deposit investors can open. The types of CD options available may include:

•   Yankee CDs. A Yankee CD is a certificate of deposit that’s issued by a foreign bank through a U.S. branch. These CDs may offer fixed or floating interest rates and require a minimum deposit of $250,000 or more. Because the funds are held at a foreign bank, these CDs are not federally insured.

•   Brokered CDs. A brokered CD is a CD that’s offered through a brokerage on the secondary market. Brokered CDs may be FDIC-insured if certain requirements are met; otherwise, they do not enjoy FDIC protection.

•   Market-linked or index-linked CDs. Market- and index-linked CDs offer returns based on an underlying market benchmark or index. For example, you might open an index-linked CD that aims to match the returns of the S&P 500® Index. These uninsured CDs are also referred to as equity-linked CDs.

A CD may also be uninsured if it’s issued by a financial institution that has no affiliate with the FDIC or NCUA. You can usually tell if a bank or credit union is FDIC-insured by looking for the appropriate signage at a branch or on the homepage of their websites.

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Advantage of an Uninsured CD

Why might someone choose to invest in an uninsured certificate of deposit?

A simple answer is that higher risk may be balanced against greater rewards. A two-year Yankee CD, for example, may offer a fixed rate approaching 2%. A regular two-year CD, on the other hand, might offer just 0.22% to savers. Thus the opportunity to earn a higher return may outweigh the potential risks for investors who are focused on growing their money with CDs.

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Are Certificates of Deposit FDIC Insured?

The FDIC insures a number of different types of deposit accounts at banks, including certificates of deposit. So CDs can be FDIC-insured, if they’re held at member banks. FDIC insurance coverage can extend to:

•   Standard CDs

•   Jumbo CDs

•   No-Penalty CDs

•   Add-on CDs

•   Bump Up CDs

•   Raise Your Rate CDs

But again, not all CDs are FDIC-insured. That’s important to note, as an uninsured certificate of deposit doesn’t carry the same protections as insured CDs. If your bank fails, you wouldn’t automatically be entitled to recoup money deposited in an uninsured CD held at that financial institution.

You also need to keep in mind that FDIC insurance and NCUA insurance is not blanket coverage. There are limits on how far this coverage extends. Generally only $250,000 is covered, per account, per person (see details below).

How FDIC Insurance Works

FDIC insurance protects consumers if their bank fails. You don’t need to apply for this insurance coverage; you’re covered automatically when you have accounts at a member bank. If a bank fails, the FDIC pays depositors within a few days of its closing, up to the applicable limit.

The standard coverage limit is $250,000 per depositor, per account ownership type, per financial institution. This is the same coverage limit that’s offered by the NCUA for CD savers at credit unions. If you have accounts at both banks and credit unions, it’s possible to be covered by both types of insurance.

The coverage limit is important to remember when asking, Is a CD FDIC-insured? The answer may be yes, but only up to a certain amount, depending on how much money you keep in CD accounts and other deposit accounts at the same bank. The FDIC offers an online estimator tool to help you determine how much of your deposits are insured at any given time.

Understanding Uninsured Certificates of Deposit

An uninsured CD can be attractive as an investment if you’re looking for alternatives to the certificate of deposit options your bank offers. Generally speaking, CDs are safe investments. You can deposit money into a CD and earn a fixed interest rate. Once the CD matures, you can withdraw your deposit plus interest, or roll it over to a new CD.

Your money isn’t invested in the stock market so there’s very little risk of loss. And even if the bank fails, you’d likely still be covered by FDIC protection. An uninsured certificate of deposit, on the other hand, carries more risk since you don’t have FDIC coverage.

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Special Considerations for Uninsured CDs

When considering whether to invest in an uninsured certificate of deposit, it’s important to think about how much risk you’re comfortable taking. The risk factor can vary across different types of uninsured CDs. A floating rate Yankee CD, for example, may be riskier than a fixed-rate Yankee CD since it may be more difficult to estimate your returns.

Also, consider how much money you’ll need to invest if you’re looking into specialized uninsured CDs. While you might be able to open a standard CD at your bank with $500 or $1,000, you might need $100,000 or more to open a Yankee CD or a market-linked CD at a brokerage.

Uninsured CDs: Real World Example

It’s possible you might have an uninsured certificate of deposit without even realizing. For example, say you have checking and savings at the same bank. You don’t own those accounts with anyone else. Your combined balance across accounts is $200,000. You decide to open a new CD account and transfer $100,000 to it from an account held at a different bank.

Your combined balances across checking and savings and your CD account at the same bank now total $300,000. Under FDIC insurance rules, you’d only be covered up to $250,000 of that amount and the remaining $50,000 would be uninsured.

The FDIC applies insurance coverage limits per financial institution. So it’s possible to max out the limit at each bank where you have a CD account or any other eligible deposit account. Going back to the previous example, you could deposit $50,000 in the CD instead, then take the other $50,000 and open a CD at a different bank without exceeding FDIC insurance limits.

Pros of an Uninsured CD

Here are some of the advantages of uninsured CDs:

•   Investors may earn higher rates compared to regular CDs.

•   Market- or index-linked CDs may allow you to match the returns of a particular benchmark or index, similar to the way an index mutual fund works.

•   Brokered CDs may still be partially insured.

•   Uninsured CDs can also add diversification to a portfolio. The more diversified your investments are, the easier it may be to manage risk.

Cons of an Uninsured CD

Here are some of the drawbacks of an uninsured certificate of deposit:

•   No FDIC or NCUA protection.

•   Greater risk could mean a greater possibility of losing money.

•   Larger deposits may be required to open an uninsured CD.

Additionally, you may not be able to get a CD loan with an uninsured certificate of deposit. A CD loan allows you to borrow money using your CD balance as collateral. In terms of CD loan pros, this type of borrowing arrangement can help you build credit as you repay the loan. Your CD deposit can also continue earning interest during the loan period.

The Takeaway

Uninsured CDs could be a good fit for your financial plan, if you’re looking to set aside a large amount of money for a fixed period of time, at a higher rate than a standard CD or savings account. There are various types of uninsured CDs to choose from, but they generally require higher minimum deposits of $100,000, $250,000 or more. And these CDs may have additional restrictions, so be sure to do your research. A Yankee CD, for example, is only available via the U.S. branch of a foreign bank.

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FAQ

Are all CDs FDIC insured?

No, only CDs that are held at FDIC member banks are insured. FDIC coverage applies up to the standard limit of $250,000 per depositor, per account ownership type, per financial institution.

Who benefits from a certificate of deposit?

People who want a safe, secure way to save money while earning interest can benefit from opening one or more CD accounts. A CD can be used to save for short- or long-term goals and FDIC coverage offers reassurance that your money won’t be lost if your bank goes under.


SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


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