Should You Buy Identity Theft Insurance?

Winston-Salem, NC 9/29/2014

A number of insurance companies that we represent offer some form of identity theft coverage as an endorsement to their Homeowner's coverage forms. Is it a good buy? Are these carriers simply preying upon an unreasonable fear of this type of event in the wake of large scandals involving Target and Home Depot customers where massive amounts of data are compromised?

Many people do, in fact, fall victim to this type crime. More than 11.6 million adults in the United States dealt with identity fraud in 2013, up 14 percent from the previous year, according to a recent report from Javelin Strategy & Research. In order to make an informed buying decision, let's take a look at this frequently misunderstood product.

What identity theft insurance covers:

The term "insurance" may lead some consumers to believe identity theft policies will reimburse them for any funds that are stolen as a result of identity fraud. "While these policies are insurance products, they often don't conform to what consumers traditionally think of as insurance," says Michael Barnett, executive director of the Identity Theft Protection Association. In his opinion, ID theft policies are more like "expense reimbursement programs" than traditional insurance.

"If you are in a car accident, your auto insurance policy covers losses, which are typically the costs to fix your car and any injuries you suffered," says Denis Kelly, president of IDCuffs.com. "Identity theft insurance doesn't pay for the costs to fix your identity or the injuries you suffered as a result of being victimized; rather, it pays the equivalent of the cost to have your car towed and possibly the shipping costs of a new car."

Identity theft insurance may cover expenses such as phone bills, lost wages, notary and certified mailing costs, and even attorney fees, according to Michael Barry, a spokesman for the Insurance Information Institute. Some companies also offer restoration services to guide victims through the process of restoring their identity, he says.

Most of the carriers that we represent offer this endorsement for a nominal fee of $15-$25 annually. They typically provide a case manager to assist you with best-practices solutions for addressing your situation. As you can imagine, at this price, most of their support is informational, with coverage for small, reimbursable fees only. The biggest expense with this type of incident is ususally your time spent addressing it. These case managers serve to drastically reduce your time out of pocket handling the details. As such, these endorsements were not designed to reimburse you for large monetary or other financial losses.

Where can you get ID theft insurance?

There are plenty of options for purchasing identity fraud policies. Produced and underwritten by insurance companies, they are sold through insurance agents, credit bureaus, identity theft protection companies, credit card issuers, banks and credit unions, Barnett says.

In most cases, your homeowners or renters insurance will cover theft of cash up to $200 or credit cards up to $50, but some homeowners policies now include coverage for identity theft as well, Barry says. As we discussed, if identity theft insurance isn't automatically included with your homeowners policy (Central Mutual provides automatic covearge), it can often be added for about $15 to $25 per year.

How does it work?

Identity theft insurance will reimburse a policyholder for expenses incurred to restore his or her identity, up to the limits stated in the policy. Coverage limits can range from $10,000 to $1 million, according to Barnett.

While such high limits may sound generous, it pays to scrutinize the coverage terms. "Informed consumers must look beyond the marketing claims of coverage of $10,000, $25,000 or even $1 million, and carefully read the fine print to understand the terms, conditions and exclusions," Barnett says.

Do you need insurance for identity theft?

Some important considerations include the following.

Are any other services included? Even if an identity theft insurance policy will reimburse or offset the costs involved in resolving the incident, it may not eliminate some of the time and hassle required to rectify the situation, Barnett says. Ask if the insurer will provide help with any of the recovery work.
Is there a deductible? A significant deductible, such as $500 or more, is not unusual for identity theft insurance, Barnett says.
If the costs to repair the damage to your identity are less than the deductible, you still may be responsible for paying for all the damages. On average, victims of identity fraud pay an out-of-pocket cost of $631 per incident, according to 2013 data from Javelin Strategy & Research.

Does the policy cover legal expenses or lost wages?

Legal expenses and lost time from work are often covered under identity theft policies, but if they are, there may be a limit as to how much is paid and preapproval may be required, Barnett says. Because these can be costly results of identity theft, a policy that specifically provides for reimbursement of lost wages or legal fees may be worth the additional premium, he says.

Other options for ID theft protection:

Aside from identity theft insurance policies, consumers have other options for protecting themselves against ID fraud, such as credit monitoring services. However, these services can cost between $8 and $30 per person per month, and only detect certain forms of ID theft, according to Barnett. "Identity thieves can easily misuse your information in many ways that may never appear on your credit report, and the potential damage of an identity theft incident is not limited to what may get reported to a credit bureau."

Most credit monitoring services will not alert you to several types of activity that could be related to identity theft, such as someone obtaining a driver's license, birth certificate, Social Security card, or other such documents or identification in your name, Barnett says.

Another way to protect yourself from identity theft is to obtain and review your annual credit reports on your own, at no charge. The federal Fair and Accurate Credit Transactions Act allows you to receive a copy of your credit report from each of the national credit reporting agencies for free, once per year. You may also want to consider a credit freeze if you are not actively applying for credit yourself -- it prevents new creditors and businesses from pulling your credit file.

"Consumers have many risk-management resources available to them, both free and fee-based," Barnett says. "Many consumers fall victim to identity crimes through absolutely no fault of their own, but it is critical that you remain vigilant and take care to safeguard your personal information at all times."

Please contact our agency if you have further questions regarding how to evaluate your specific need for identity theft or credit-monitoring solutions.

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