Banks aren’t only insured institutions

When you see a meteor crash through your neighbor’s house, bounce out his picture window, roll over his car and finally come to rest atop his lawn gnome, your first thought is to wonder if everyone’s OK. Your second thought: “Gosh! Do I have meteor insurance?”

Actually, most homeowners’ policies cover meteor damage, though it’s always a good idea to read the fine print. After the failure of IndyMac Bank, though, you might be wondering if other financial institutions, such as brokerages and life insurers, are covered by some form of insurance. The answer is yes, but the coverage is a bit more complex than federal deposit insurance.

The Federal Deposit Insurance Corp. covers bank deposits of up to $100,000 per person per bank. It also insures retirement account deposits for an additional $250,000. So you could have $100,000 in your checking account and $250,000 in an IRA certificate at the same bank, and all your money would be insured. You can obtain additional coverage according to how your accounts are titled. To help you figure out what’s covered, the FDIC has an online deposit insurance estimator that you can use at fdic.gov/edie/index.html.

When the FDIC acts, it usually arranges for a healthy bank to acquire a failing bank. In an acquisition, deposits typically continue to earn interest at the same rate as before.

But what happens if your brokerage fails? The Securities Investor Protection Corp. (SIPC) steps in.

SIPC covers you if your brokerage fails and can’t return to you all the cash or securities in your account. If, for example, you had 100 shares of IBM in your brokerage account and your broker failed, SIPC would make sure your 100 shares were restored to you.

SIPC doesn’t protect you against shysters who sell you penny stocks that turn out to be, well, penny stocks. Neither does it cover limited partnerships or commodities futures contracts.

SIPC covers cash assets up to $100,000 and replaces up to $500,000 of securities, such as stocks and bonds. (You could receive more if SIPC recovers enough of the firm’s assets in legal proceedings.) To get your SIPC claim covered, though, you need to prove which securities you owned when the brokerage failed. So be sure to keep copies of your brokerage statements and confirmation slips.