Uninsured Certificate of Deposit

What Is an Uninsured Certificate of Deposit?

An uninsured certificate of deposit is a certificate of deposit (CD) that is not insured against losses. Due to the lack of insurance, these CDs yield a higher interest rate, as the purchaser assumes all of the risks. If the financial institution or entity that issued the CD goes bankrupt, the purchaser loses the investment.

Key Takeaways

  • An uninsured certificate of deposit is a CD that is not insured against losses by either the FDIC or NCUA.
  • Typically uninsured CDs have higher interest rates because the purchaser of the CD assumes all the risk associated with them.
  • Examples of uninsured CDs are Yankee CDs, bull CDs, and bear CDs.
  • Most CDs are insured by the National Credit Union Association or the Federal Deposit Insurance Corporation.
  • CDs, along with savings accounts and money market accounts, are savings vehicles that you can invest in at your credit union or local bank.

Understanding Uninsured Certificates of Deposit

Most certificates of deposit are insured by either the Federal Deposit Insurance Corporation (FDIC) or, in the case of credit unions, by the National Credit Union Association (NCUA). These institutions would pay CD holders up to a certain limit in the event that the lending financial institution was insolvent. However, there are uninsured certificates of deposits, like offshore CDs, and brokered CDs.

Offshore CDs put your money in a foreign institution's bank certificate. The lure is interest rates that are a multiple of what you can get on a similar investment in the United States. However, the danger is betting on the safety of a foreign bank, and if your money is kept in that country's currency rather than U.S. dollars, you are exposed to currency risk.

Special Considerations

An FDIC Insured Account is a bank or thrift (savings and loan association) account that meets the requirements to be covered by the FDIC. The type of accounts that can be FDIC-insured includes negotiable order of withdrawal (NOW), checking, savings, money market deposit accounts, and Certificates of Deposit (CD). The maximum amount insured in a qualified account is $250,000 per depositor, per member institution. That means if you have up to that amount in a bank account and the bank fails, then the FDIC makes you whole from any losses you suffered.

Other categories of CDs are exotics that are put together by investment companies. Investors in search of yield sometimes buy these without realizing that they are not government-guaranteed. They may have high teaser rates, long lock-up periods, variable rates, rates of return tied to indexes like the stock or bond markets, or even variable rates tied to an asset that has no publicly revealed price.

Some brokered CDs may be partly uninsured. Other forms of CDs are the bull CDbear CD, and Yankee CD. The bull CD's interest rate correlates directly with the value of its underlying market index. When someone invests in a bull CD, they are guaranteed a minimum rate of return and an additional specified percentage, based on the associated market index. The interest rate a holder of a bull CD receives during the life of the CD increases as the value of the market index increases.

Is it safe to invest in an uninsured CD?

There are risks involved with an uninsured CD. Investors put their money at risk all the time in uninsured options like mutual funds, annuities, life insurance policies, stocks and bonds. Each individual has to decide if the higher interest rates are worth the risk.

What are the benefits of an uninsured CD?

While an uninsured CD carries risk, the biggest benefit is you can earn more money. Higher interest rates over time will bring in a much higher rate of return. If you are confident in the market, an uninsured CD could make sense for you.

Are CDs insured by the FDIC?

The majority of CDs are provided through banks or credit unions, and these options are insured by the FDIC for up to $250,000. There are uninsured options, typically offered through a brokerage. These options include off-shore CDs, bull CDs, bear CDs, and Yankee CDs. 

Article Sources

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  2. FDIC. "Are My Deposit Accounts Insured by the FDIC?"

  3. FDIC. "Insured or Not Insured?"