You probably fear identity theft. And, with good reason.
For more than a decade, it has been the number-one consumer complaint filed with the Federal Trade Commission (FTC).
You live in a digital era. According to the FTC, 62 percent of identity theft currently happens over the Internet.
And, you might be shaken to the core every time you read media accounts of identity thefts The victims, it seems, are plunged into financial, bureaucratic, and emotional catastrophe. One version of that is the “Jim story.” There is a well-educated professional going about his life. Then he finds himself struggling for the rest of it trying to clear six-figure credit card debt and his name. The identity thief was his then-wife.
Identity theft insurance seems smart way to go, but …
Consequently, you likely consider purchasing identity theft insurance as making good personal-finance sense. It may. But, on the other hand, it may not. You also have the option of the Do-It-Yourself (DIY) approach.
Before you make any decision, first let’s investigate what identity theft is and its more typical dynamics.
Identity theft cannot be prevented
What you must understand from the get-go, is this: No insurance policy and no master cyber sleuthing by you can prevent identity theft. That’s impossible. Your personal identifying data might be among the records of a retailer, hospital, or government agency when it is hacked. You automatically become a victim of identity theft. The best the insurance services or you yourself can accomplish is monitor account activities. That will help you foil some schemes, but not necessarily all.
The real objective of the services of the insurance company and your own efforts is to reduce the probability of becoming a victim. Here are current best practices.
In addition, know this: If you do become a victim, the experience is bound to be more of an inconvenience than a full-scale nightmare. Much of the fear about identity theft has little basis in reality. Fear is a standard mechanism for selling insurance products. Here are four ways to deal with that grim truth:
1. Financial identity theft can be efficiently resolved
There are two kinds of identity theft.
One is the financial kind. Imposters gain access to your personal identifying information. Usually that includes Social Security number and driver’s license. Then they leverage the data for personal gain, ranging from obtaining credit cards in your name to withdrawing funds from your bank and investment accounts.
According to the Bureau of Justice Statistics, that happens to about seven percent of adults. They typically produce losses you personally have to absorb from one to a hundred bucks. That’s because 86 percent involve fraudulent use of existing credit card and banking accounts. Federal law limits your credit card liability to $50. Many credit card companies and banks might guarantee zero liability.
Resolving all this with financial institutions, federal agencies, and local police, on the average, requires a day. If you purchase insurance, designated personnel will do that for you or oversee the steps you must take. Is a lawyer needed? Not usually.
What insurance will cover are some of the expenses involved in this process. You have to read the fine print carefully to find out what categories will be reimbursed. For example, will the expense of hiring a lawyer be covered and up to how much? What are the maximums on other kinds of expenses? What are the deductibles and how much is each?
No direct financial losses will be paid back. That is what you have to keep in mind.
2. Criminal identity theft can require complex record-clearing
The second kind of theft is criminal identity theft. This can occur in two ways.
The first is when an imposter uses your identifying personal information during an investigation of a crime or when arrested. In the latter, a date may be set for the miscreant to appear in court. Usually it will be a no-show. Then a bench warrant will be issued for an arrest. It’s only when you are the one arrested that you will realize you have become a victim of criminal identity theft.
The second way this can happen is when imposters use your identifying personal information to establish a whole new identity. They may be running from the law. This was common in the days of Al Capone. Back then, the new identity was acquired by murder. The most famous instance of this kind of identity theft was fictional. On the television series “Mad Men,” Don Draper, who was really Richard Whitman, stole the identity of a dead soldier.
Usually in the second kind of criminal identity thieves are smart enough to lay low. You will likely only discover they are using your identity when they wind up in trouble with the law. For example, they may be arrested for domestic violence.
You will need to set the records straight and clear your name. The burden is on you to go through all the procedures in the criminal justice system – federal, state, and local.
Since both human beings and databases are involved, the process can be time-consuming and frustrating. In addition, clearing your name might extend beyond the criminal system. Government entities might have sold data.
Can you handle this as a DIY? If you have resolved myriad medical insurance bills or an error on your credit report successfully, you probably can attempt to navigate the people and information systems. Here is a guide from the Privacy Rights Clearing House.
What about if you have identity theft insurance for this? That, as with financial identity theft, will only cover expenses. In this situation, one category important to you is reimbursement for lost time at work. You may have to appear in court. Another category you will probably need is the expenses paid for a lawyer. But what is the cap on the pay-out? Lawyers are expensive.
3. If you decide on insurance, you must shop
There are many ways identity theft insurance is available to you.
What you must review carefully are the terms and conditions, especially the fine print, and the corresponding fee. You then compare those with other kinds of policies offered by competing companies.
In addition, you must verify the credibility of the carrier. You can do that through the Better Business Bureau, trade associations such as the National Association of Insurance Commissioners, and government agencies – federal and state. LifeLock, a credit monitoring service, had agreed to pay the FTC $12 million in fines for deceptive claims and practices.
You may already have identity theft coverage as part of added-value your financial institutions provide. Contact the institutions and ask if that is in-place. If not, ask them if they offer it, what are the terms and conditions, and what is the price. Read the policy carefully. Compare this with other kinds of policies.
You must also check your homeowners’ or renters’ insurance. That might already be a benefit. If it isn’t, you may be able to purchase a rider on that policy. That is usually less expensive than a stand-alone policy. But, again, compare features and price, with other policies.
For stand-alone policies, most are presented online. Just put in keywords “identity theft insurance provider.” Compare and contrast the different features, especially the promotional offers. Most provide a free trial. That’s for you.
4. Here are DIY resources
The good news is that financial institutions are on your side. They want to help you help yourself to avoid becoming a financial identity theft victim. That erodes their own brand identity.
For example, you can custom-make alerts with your credit card companies and banks to be electronically notified as soon as a transaction takes place. For no or a small fee you can put what is known as a “security freeze” on your account with the credit bureaus. No new credit accounts can be established without notifying you first. There are also free fraud alerts. Before businesses open new accounts in your name or extend a line of credit, they have to go through a series of procedures to verify your identity.
The Identity Theft Resource Center has a free ID theft victim hotline.
If a victim, you will:
File an Identity Theft Affidavit and create an Identity Theft Report with the FTC (ftc.gov/complaint). Listen to its instructions about the next steps.
Contact the local police in order to complete your Identity Theft Report
Notify the credit bureaus. If you don’t already have a security freeze and a fraud alert, create them.
Directly notify the affected financial institutions.
Keep a record of all voice, digital, print, and in-person communication. These could wind up being legal documents.
Microinsurance could be among future options
Hyper vigilance through insurance policies and by you, new software, and stiff punishment for identity thieves might reduce this type of crime. But, it won’t go away.
In the future, though, the insurance industry might be providing you with microinsurance. That is the option to custom-make a low-cost policy for only what you need. You decide you can do the credit monitoring and post-theft reporting yourself. The a la carte service you may want is $15,000 of legal expenses reimbursed, with a $350 deductible. That could be the next disruption in the insurance sector.
Until then, you have to decide to purchase a standardized policy, go with the one already bundled into services provided by your financial vendors, or DIY. But, hopefully, now fear is no longer in the way of your decision-making.