Uninsured Certificate of Deposit: What It is, How it Works, FAQs

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Updated June 21, 2022

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What Is an Uninsured Certificate of Deposit?

An uninsured certificate of deposit is a 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, then the purchaser loses the investment.

Key Takeaways

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

Understanding Uninsured CDs

Most CDs are insured by either the Federal Deposit Insurance Corp. (FDIC) or, in the case of credit unions, the National Credit Union Administration (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 CDs, such as 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 in 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 CDs. The maximum amount insured in a qualified account is $250,000 per depositor, per member institution. This 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 that 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 CD, bear 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 that 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 certificate of deposit (CD)?

There are risks involved with an uninsured certificate of deposit (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 that 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 Federal Deposit Insurance Corp. (FDIC)?

The majority of CDs are provided through banks or credit unions, and these bank options are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000. The National Credit Union Administration (NCUA) provides similar protection for credit union options. There are uninsured options, typically offered through a brokerage. These options include offshore CDs, bull CDs, bear CDs, and Yankee CDs.

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