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How Uninsured Certificates of Deposit Work

By Rebecca Lake · May 18, 2022 · 6 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.

CDs aren’t the only way to save, of course, and SoFi now offers a new all-in-one Checking and Savings that can help you save big. You can sign up for an account right from your phone and pay zero account fees — and if you qualify and sign up with direct deposit, you can earn 1.50% APY. Open your Checking and Savings today.

Learn more about banking with SoFi.

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 can earn up to 1.50% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.90% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.50% APY is current as of 06/28/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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