Identity Theft Insurance - Is It Worth It?

March 2, 2008

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Last time you were purchasing insurance, you may have been offered something called identity theft insurance. The price probably wasn’t that much - $25 to $100 a year maybe. Why not spend that extra bit of money for the peace of mind?

Well, I wish I could tell you that peace of mind is exactly what identity theft insurance provides, but then I’d be lying. And bloggers never lie. So, what is identity theft insurance and is it worth it?

Insurance Means Its Good, Right?

Identity theft insurance is offered by many insurers, either as a rider on your existing homeowner or renters policy, or as a standalone policy. The two most important points about identity theft insurance are what it is NOT:

• It does not protect you from identity theft in any way
• It does not cover direct monetary losses from identity theft

What ID theft insurance covers is some of the expenses that are incurred when dealing with identity theft.  Some examples are phone calls, paperwork and mailing, lost wages, and pre-approved legal fees, but it obviously depends on the policy.

Is it worth it?

I could set this up listing the pros and cons and give a balanced summary, but instead I will say that I agree with Chuck Jaffe from MarketWatch that ID theft insurance is the stupid investment of the week.

Here are the problems with this type of coverage:

• The worst part of dealing with identity theft is the damage to credit scores and the fallout from that.  Direct costs to recover aren’t generally that much.  The FTC says the average victim puts out less than $1,500
• How much do phone calls really cost these days?  More often than not there will be a 1-800#, and many people have cheap calling plans
• Lost wages sound great, but in the event that you do have to take time off work, many people will probably take vacation days
• I can guarantee that dealing with the insurance company to “pre-approve” lawyer fees is going to be just as painful as dealing with the identity theft itself
• Did I mention the deductible?  Usually there is $150-250 for a deductible, so given the above it is sounding less and less worth it
• Your credit card may already have some sort of ID theft assistance

Honestly, if you are going to spend $25-100 a year, you are probably better off buying a good cross-cut shredder or if you really need to spend it, an identity theft protection service like TrustedID or LifeLock.  At least they do something preventative.

Am I missing the boat here?  Do you think identity theft insurance is worth it?

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