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The Problem With Identity Theft Insurance

Mar 30, 2008
The wolf is at the door. Identity theft is the fastest growing consumer crime in the country. The Federal Trade Commission estimates that 9 million Americans have their identities stolen each year. Yes, ID theft is serious business, and it may well touch your life at some point. But are you willing to trust the country's financial institutions and insurance companies to protect you from the ID theft wolf?

Most lenders and insurance companies offer some form of protection from identity theft at a price. But, is it worth it? The problem with identity theft insurance is that it may well cost too much for what you get. True, it does not cost much. Insurance companies pitch their ID theft products by saying "it only costs a few dollars a month to buy piece of mind." If you add a rider to your basic homeowner's insurance policy, ID theft coverage typically costs from $20 to $100 a year.

But check the policy carefully to see exactly what you are buying. For example, some ID theft policies do not cover legal fees or lost wages due to time away from work that you may incur while attempting to erase the effects of the crime. The insurance may only cover some of the expenses you incur, such as the costs of making phone calls and copies, mailing documents, and possibly legal bills.

Also pay close attention to the deductible on the identity theft insurance policy. If you are lucky it may range from $100 to $250, but some policies have a deductible as high at $1,000. Since the average victim spends less than $1,500 to recover from ID theft, a $1,000 deductible is not very helpful to you.

Even if you find a policy with low rates, a low deductible, and few exclusions, remember that you may be able to get ID theft protection for free. Some credit card companies and financial institutions make identity theft assistance available to cardholders for free. American Express, for example, provides round-the-clock telephone access to representatives who will help you figure out if your identity has been stolen, lead you through the recovery process, and provide tips to protect yourself in the future.

In summary, although the cost of identity theft insurance seems very reasonable, the benefits are usually very limited. The editors of a leading consumer magazine reported that ID theft policies are "typically not worth the money."

It makes a lot more sense to prevent identity theft from ever happening in the first place, than to pay for insurance to help clean up the mess after the fact. There are many actions you can take right now to protect yourself. Lock up your personal identifying information, such as your social security card and birth certificate. Scan your bills every month for fraudulent charges. Shred bills and other documents with personal identifying information. Request a copy of all three of your credit reports, and examine them for accounts that a thief may have opened in your name. The Federal Trade Commission sums it up in three words, "Deter, Detect, and Defend."
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