What is an Uninsured Certificate of Deposit (CD)?

An uninsured certificate of deposit (CD) is a certificate of deposit that is not covered by depositor’s insurance.

Certificates of deposit (CDs) are insured up to the maximum allowable amounts by either the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance if they are issued by U.S. banks or credit unions. CDs issued by foreign banks or by brokerages are not covered by FDIC or NCUA insurance.

How an Uninsured CD Works

Just like a traditional CD, an uninsured CD has a specified maturity and rate of return that will be paid according to the terms of the security. Typically, these instruments pay a much higher rate of interest than insured CDs because the investor assumes more risk.

Insured CDs guarantee a total return of principal up to the insured limit ($250,000 per account). However, investors in uninsured CDs receive no such guarantee and so assume more risk.

Examples of Uninsured CDs

Uninsured CDs are often designed and marketed by investment firms. They can be structured to track an investment index offering higher potential returns than traditional bank CDs. Uninsured CDs may also be offered by foreign banks; however, because they are purchased offshore, they typically will not carry FDIC or NCUA insurance.

Some CDs issued by brokerages are linked to market performance or an index, and are referred to as “Bull” or “Bear” CDs. The rate of return on the CD is determined by the performance or movement of the index. A Bull CD may offer a certain level of return based on the index rising while a Bear CD’s return is contingent on a falling index.

Another example of an uninsured CD is what is known as a Yankee CD. Yankee CDs are large denomination CDs issued by U.S. branches of foreign banks. Some Yankee CDs may only carry partial FDIC insurance or none at all depending on the terms of the instrument.

Not All Insured CDs Are the Same

Even if a CD is insured, the insurance may not cover all of an investor’s potential loss. The limits of FDIC insurance max out at $250,000 per account. Therefore, if a bank customer purchases a CD for $300,000, the $50,000 over the maximum limit is uninsured.

Also, accrued or compound interest may not be insured. For example, an investor purchases a five-year, $100,000 CD paying 2% interest and opts to compound the interest payments. If the issuing bank fails two years after the purchase, the investor may only receive the original principal amount of $100,000, forfeiting $4,000 in accrued interest.

Market-linked CDs that may be insured are typically insured for principal only, so any embedded gains or returns due to market appreciation are forfeited in the event of institutional failure.