Is Identity-Theft Insurance A Waste Of Money? By Priya Anand
Why these policies may not offer much protection
Consumers these days are more worried about fending off hackers than pickpockets. Companies are capitalizing on these fears by pitching the digital-age equivalent of a can of Mace: ID theft insurance.
But before buying such protection, experts warn consumers should find out what the particular policy covers, experts say: When you wreck your car or set your house on fire, auto and homeowners insurance cover the repairs.
When a fraudster drains your bank account, identity-theft insurance doesn’t replenish it — your bank’s zero-liability policies should take care of that. Nor can some variations of the product, advertised as crediting monitoring and protection services, actually insulate you from a hack.
More than 2 million electronic records have been breached since January, and some 864 million have been since 2005, according to the nonprofit Privacy Rights Clearinghouse, which keeps an online tally.
Cyber attacks are a problem for everyone, from big-box retailers like Target TGT +1.26% to government offices such as the California Department of Motor Vehicles and the Malibu wine shop that reported unauthorized access to customers’ credit card information last week.
Experts say consumers searching for protection may find ID-theft insurance falls way short.
The insurance, which is commonly tacked onto existing home, auto and travelers policies, costs between $25 and $60 annually, according to the National Association of Insurance Commissioners. That figure increases if you purchase it separately.
Such policies cover expenses people might accrue while repairing their credit record, like the cost of postage, phone calls, lost wages (if you need time off work) and legal bills.
But the chances of facing out-of-pockets costs are slim: 80% of the 12.6 million victims in 2012 didn’t incur any, according to a Javelin Strategy & Research survey .
Some policies also connect victims with a case manager to help them clean up the mess. In the vast majority of identity theft cases, though, that process means a simple call to the bank. For 85% of victims in 2012, the identity theft they experienced involved misuse of an existing credit card or bank account.
It took more than half of victims a day or less to resolve problems, according to the Bureau of Justice Statistics.
In some ways, buying ID-theft insurance is like hiring a wedding planner. You can pay someone to call florists and caterers, and in this case, contact your bank to cancel a card, or you can do it yourself.
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“People shouldn’t be mesmerized by the insurance that may be provided. It’s more important to look at how the service actually works and what it does for you,” says Susan Grant, director of consumer protection at the Consumer Federation of America.
“Are you looking for somebody, for instance, who’s going to do everything for you if you have a problem, or are you confident that if somebody gives you advice, you’d just be able to do it yourself?”
There are a number of protections people can get for free. For instance, credit experts recommend consumers set up custom alerts with their banks and credit card companies to receive emails or texts for transactions.
People should also review their online statements daily and check their credit reports from each of the three bureaus, Equifax, Experian and TransUnion, once every 12 months.
And consumers can put a “security freeze” on their account with the credit bureaus for a small fee (usually less than $10), which can help prevent a fraudster from opening a new line of credit in your name.
Or people can sign up for free fraud alerts, which require businesses to take extra steps to verify your identity before opening new accounts or increasing a credit limit.
And there are other free resources available as well. The Identity Theft Resource Center offers a free ID theft victim hotline. Eva Velasquez, president and CEO of the San Diego-based nonprofit, says consumers should check their homeowners insurance policies because ID theft insurance may already be included and take advantage of resources that are free.
Banks and credit card companies already watch accounts for fraud, and paying for another monitoring service doesn’t guarantee security.
“How much more are those analytics going to be catching? I really don’t know and I’m not sure that as a consumer you could really gauge that,” she says.
These companies likely make “obscene profits” on ID theft policies, which are “based on your irrational fears,” says University of Pennsylvania professor Tom Baker, co-authored a paper called “Do You Want Insurance With That? Protecting Consumers From Add-On Insurance Products” at the Connecticut Insurance Law Journal in January 2013.
“From an economic theory concept, people shouldn’t be buying any kind of peace of mind insurance,” he says. “We think about the consequences of identity theft. They’re very upsetting, but they’re not expensive.”
Insurers say the products are helpful to consumers. Nationwide’s ID theft insurance, which homeowner’s policyholders can purchase as a $45 rider, covers up to $25,000 in recovery expenses from identity fraud.
Experts on their hotline walk victims through the steps they take to correct their records. The resolution specialist is really helpful. They will give them a step-by-step instruction,” said Deidre Abbitt, the company’s identity theft product manager.
As for credit-monitoring services, they do just what their name implies. They monitor your credit to warn you if a scammer tries to open an account in your name. What they can’t do, experts say, is stop that from happening.
LifeLock, a credit monitoring company, agreed to pay the Federal Trade Commission $12 million in fines for deceptive claims that it could always prevent identity theft. The commission also found that LifeLock wasn’t adequately protecting its own customers’ data.
Another provider, Identity Guard, offers credit-monitoring and alert packages that cost from $120 to $300 annually. Its services include scanning the black market and public records for your information and software that encrypts your keystrokes.