Is Identity Theft Insurance Worth It? Usually Not — Here's Why

What identity theft insurance actually covers — and what it doesn't

Identity theft insurance sounds like a serious safety net. The marketing suggests that if a thief steals your identity, the policy will make you whole. That is not quite right — and understanding the difference matters before you pay for a policy you may not need.

As the Federal Trade Commission explains, identity theft insurance generally reimburses the costs of recovering your identity — things like postage for certified letters, notary fees, phone charges, and some lost wages while you deal with the fallout. Some policies include a limited legal expense benefit.

What identity theft insurance typically does not cover is the money a thief actually stole from you — the fraudulent charges on your account, the loan opened in your name, the funds drained. That is covered (if at all) by your bank or card issuer under separate rules, not by an identity theft policy. The insurance covers the receipts; it does not cover the theft.

The receipts are not where the real harm lives

When identity theft damages your credit, the out-of-pocket costs are usually the smallest part of what you have actually lost. Think about what really happens:

• •Damaged reputation and creditworthiness. Fraudulent accounts, late payments, and collections on your report can cost you mortgage approvals, apartment rentals, job opportunities, and favorable interest rates. The dollar value of that harm can be enormous — and the insurance does not pay it.
• •Emotional and mental distress. Discovering your identity has been stolen — and then spending months trying to fix it — causes real anxiety, frustration, and stress. Courts recognize this as compensable harm.
• •Lost time. Hours and days spent writing letters, calling creditors, dealing with debt collectors, and disputing accounts with the bureaus represent real losses the insurance does not price.

These are precisely the kinds of losses that FCRA lawsuits are designed to compensate — and they are not what identity theft insurance is designed to pay.

What about credit monitoring? Is that worth it?

Credit monitoring services — offered by LifeLock, Experian CreditWorks, and many others — send you an alert when a new account appears on your credit report. That sounds helpful, but consider what it actually means: by the time you get the alert, the fraudulent account already exists. The damage has already started.

A free credit freeze takes a different approach. Instead of alerting you after a new account has been opened, a freeze prevents the account from being opened in the first place. Lenders simply cannot access your credit file to approve new credit while the freeze is in place. Federal law has made credit freezes free for everyone — including children under 16 — since September 21, 2018. You can freeze and thaw your file online or by phone.

You can also get free weekly reports from all three bureaus at AnnualCreditReport.com— the only federally authorized site — and review them yourself for unfamiliar accounts. That is the free equivalent of paid monitoring.

Free fraud alerts add another layer

Under FCRA § 1681c-1, you can place a one-year fraud alert on your credit file — free — and the bureau must notify the other two. Lenders must then take additional steps to verify your identity before approving new credit. If you have filed an identity theft report with the FTC, you qualify for an extended alert that lasts seven years.

And if someone has already opened fraudulent accounts in your name, FCRA § 1681c-2 gives you the right to block that information from your report within four business days of a proper request — free.

To learn more about all the rights the FCRA gives you at no cost, see: Your FCRA Rights — for Free.

This page provides general information only and is not legal advice. No attorney-client relationship is formed by reading this page.