While the threat of identity theft insurance is no doubt real, the issue has arguably become sensationalized beyond reality, thanks to overly enthusiastic reports on the fear-based evening news and the subversive advertising propagated by credit card companies themselves. Most victims of identity theft do not have their entire identities appropriated. The criminal party rarely opens new accounts, steals thousands of dollars, or wreaks irreparable havoc on the victim’s credit report. Usually, just a single credit card number is co-opted – an annoying and serious situation, but an entirely manageable one. Still, to cash in on the American public’s paranoid hoo-hah about identity theft, insurance companies are selling identity theft insurance policies.
This coverage may be included in homeowners insurance, renters insurance, or even a credit card’s terms and conditions. It’s possible that you may even have a policy without knowing it. However, thousands of folks who are frightened at the prospect of identity theft buy stand-alone policies directly from insurance companies. Are these identity theft insurance policies really worthwhile? My answer is: “almost never.”
Let’s look at them in depth. What do identity theft insurance policies actually cover?
One huge misconception is that identity theft insurance will cover any direct economic losses you incur. That’s simply untrue. All that most identity theft insurance policies do is reimburse victims for the expenses incurred in “righting” the situation with banks, merchants, and other parties. In other words, the policy will make the process of reclaiming your identity less expensive. Coverage may include:
– phone calls and faxes
– notary public fees
– credit report orders
– lost wages for time spent handling the identity theft
– legal fees (for the few and far-between cases where an attorney is needed)
– cost of reapplying for loans that you were denied (as many people don’t find out their identity was stolen until they are denied credit)
While it sounds worthwhile to have these expenses covered, how much time do you realistically expect you’ll need to straighten things out? I had my identity stolen three years ago (through my own lack of attentiveness) and spent a grand total of about two hours resolving the situation – with no time lost from work. And the financial cost to me? A few postage stamps and some phone calls that were already included in my cell plan.
Even if your identity theft situation is more complicated than mine was, are these benefits worth paying for? First, consider the premiums, which usually range from $50 to $100 per year (for most basic plans offered by major companies like Travelers, Liberty Mutual, Farmers, etc.). Then, remember there’s a deductible involved. Before identity theft insurance policies ever pay out, you may need to front $100, $250, or even $500. Most people’s identity reclamation expenses won’t ever get that high. It’s like carrying collision insurance on your ’85 Toyota that’s worth $487. Furthermore, identity theft insurance policies have limits. Even if you do have an extremely unusual identity theft case that necessitates a lawyer and involves more than a day away from your job, there are caps to legal fees and lost wages compensation.
Remember that insurance companies aren’t selling identity theft coverage because they’re personally concerned about your well-being. They’re out to sock you for a few extra bucks each year, as it lines their already deep pockets. Even if your identity is stolen and you milk the coverage, it is extremely unlikely that the investment will prove wise. My advice is, unless it’s already inextricably included for “free” along with another policy, don’t buy identity theft insurance.