You've Been Warned: Identity Theft Insurance Is A Waste Of Money

Insurance serves a simple purpose: to shield people from financial loss when the unexpected unfolds. Whether it's health insurance covering medical bills or homeowners insurance paying for storm damage, the goal is always the same — to mitigate financial risk away from the insured. By that standard, identity theft insurance should cover the direct monetary losses tied to identity theft. However, those who might have actually used identity theft insurance know that it often doesn't work that way. Instead of covering stolen funds, most policies only reimburse trivial, incidental expenses like document replacement costs.

Since Americans continue to lose large sums of money to fraud and scams, people often end up buying these policies for peace of mind. However, the truth of the matter is that individuals are often already covered by protections from their credit card issuers and networks. Visa, for instance, guarantees protection under its Zero Liability Policy, meaning that if unauthorized payments are made using a cardholder's account, the cardholder is reimbursed in full. This process may take some time, since the victim must first notify their bank or card issuer about the suspicious activity, but ultimately, they will be made whole.

Identity theft insurance is just one of many kinds of insurance products that are a waste of money, in large part because it fails to meet customer expectations. If a fraudster, for example, drains a bank account or racks up credit card charges in the owner's name, the policy will not cover those direct losses. Instead, the victim might receive compensation for costs such as lost wages while untangling the issue, notary fees, postage, or even potentially legal fees. However, the coverage offered rarely justifies the price, with premiums ranging from $25 to $50 a year, according to the Texas Department of Insurance. Still, the U.S. Government Accountability Office has determined that the typical out-of-pocket costs tied to identity recovery are often modest, and claims are rare.

Identity theft insurance can also give individuals a false sense of security. While it may suggest financial protection, like other types of insurance, buyers are really only paying for reimbursement of minor administrative expenses. To make matters worse, insurance companies collect and store sensitive personal data such as financial records, which can make them prime targets for cyberattacks and create a potential vulnerability if the insurer is compromised. Given these risks, consumers can be better served by taking proactive steps like using strong passwords, keeping a regular eye on their accounts, and even freezing their credit if they suspect a security issue.