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Identity theft insurance: Do you need it?

Identity theft is the fastest-growing white-collar crime in the U.S., often with devastating effects on the life of a person or entire family. Last year, individuals reported more than 160,000 cases of identity theft to the Federal Trade Commission. That's nearly double the 86,000 complaints reported in 2001.

All too often the victim is left with the seemingly insurmountable task of rebuilding his good name in the face of a mountain of evidence against him.

How does it happen? Identity thieves use an unsuspecting person's name, address, Social Security number and financial information to open credit cards or other accounts. They run up huge bills, then skip town, either literally or figuratively, without paying a cent.

Often, victims find that re-establishing their good name becomes an onerous undertaking, as they have to contact -- often, repeatedly -- credit reporting firms, banks and credit card companies, government agencies, and other businesses that may have been affected by the identity thieves. In the most serious cases, the thieves may commit a crime while posing as someone else, and the victim has to show that he or she isn't the one responsible. Unlike the criminal court system, in a case like this you have to prove your innocence.

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But now there's some help available.

Aware of the rise in the occurrence of identity theft, and the work victims must do to re-establish their good name, several insurance companies now offer coverage to protect individuals against the costs associated with identity theft. However, consumer advocates remain divided on how worthwhile the policies are.

How it works
Coverage for identity theft can be obtained as an option to your homeowners or renters policy, says Jeanne Salvatore, vice president of consumer affairs with the Insurance Information Institute in New York. Adding it to your existing homeowners policy costs between $25 and $50 annually.

You also may be able to purchase a policy on its own, says Walter Grote, identity fraud product manager with Traveler's Property Casualty in Hartford, Conn. A separate policy from Traveler's, for instance, runs between $60 and $180 annually.

The policies cover many of the costs associated with restoring your credit. For instance, the coverage limit offered by Encompass Insurance, Chicago, is $20,000. (Encompass is the new name for CNA Personal Insurance.) Covered expenses include fees for such activities as mailing statements to credit agencies, obtaining credit reports, making long distance phone calls, and reapplying for any loans you were denied because someone stole your identity. Some policies, including those offered by Encompass, Traveler's, and Farmers' Insurance, also reimburse reasonable attorney's fees.

Many policies also reimburse you for any wages you lose due to taking time from work to re-establish your credit. This can be helpful, as many of the offices that a victim of identity theft might have to visit, such as the Social Security Administration, generally are open during normal business hours. Lost wages often are capped at about $500 per week, for up to four weeks. If you're on a salary, you may be able to work with the insurance company to calculate an hourly rate, says Grote.

Another type of identity theft policy is offered through banks and is available when you open a checking account. "It is part of an enhancement to checking accounts," says Todd Smith, spokesman with Progeny Marketing in Nashville, Tenn. Progeny is launching the program, which is underwritten by American International Group Inc. The price ranges from $2 to $10 per month, depending on the coverage you choose. The policy covers up to $10,000 in expenses resulting from identity theft, says Smith.

The big question
No one denies that being a victim of identity theft is emotionally draining and a monumental inconvenience. Can identity theft insurance offer some protection from this? Opinions are mixed. "In this day and age, where it's so easy to create a new person, I think it's valuable," says Jeanne Heisler, president of The Ronan Agency, an insurance firm in Brick, N.J. In addition, the policies are inexpensive enough that they're unlikely to require a sacrifice for most people.

On the other hand, while identity theft insurance may provide some piece of mind and help with the expenses that you might incur, some consumer advocates remain skeptical. "My general feeling is that it's not necessary," says Susan Grant, vice president of public policy with the National Consumers League, a consumer advocacy group in Washington, D.C. "It certainly won't prevent you from being a victim of identity theft."

In addition, in many cases the out-of-pocket costs a victim of identity theft incurs aren't that substantial, Grant says. Typically, only victims of the most severe cases of identity theft need to hire an attorney. "It's the emotional damage that is the most serious," she adds.

Admittedly, a victim can face a great deal of work to restore his or her credit. On average, victims of identity theft spend up to 175 hours -- more than four working weeks -- restoring their credit, says Smith of Progeny.

Another tool in the fight against identity theft is the credit monitoring systems that the credit reporting agencies offer, says Jordana Beede, communications director with the Privacy Rights Clearinghouse, a San Diego-based consumer education organization. The services alert you when your credit file shows significant changes. The fee for Identity Guard, offered through United Guaranty Corporation of Greensboro, N.C., is about $10 per month.

While these monitoring systems can be a convenience, they also aren't the best use of consumers' money, argues Beede. "We feel that putting the responsibility on consumers to pay out-of-pocket to prevent identity theft is misplaced."

She adds that if the credit industry wanted to, its leaders could significantly reduce the incidence of identity theft. One step would be to check that all pieces of information -- the individual's name, address and Social Security number -- are accurate before authorizing a new account. "Some consumers have had credit card accounts opened just because the Social Security number matched, but nothing else did."

Rather than relying on an insurance policy, your time and money is better spent taking steps to reduce the likelihood that you'll be a victim of identity theft, says Grant. That means reviewing your bank and credit card statements when you receive them, and following up on any suspicious charges. You'll also want to call your card issuer if you don't receive a bill in the mail. A missing statement may mean that a thief has diverted your credit card statements to his or her home. Most likely, he or she isn't paying them.

In addition, you don't want to provide financial information over the phone unless you've initiated the call, and you're talking with a reputable firm. "Banks and financial institutions never call to ask for information; they already have it on file," says Smith of Progeny. It also makes sense to limit the instances in which you give out your Social Security number. If your health club, for instance, uses Social Security numbers to identify members, request a different identifier.

Many identity theft experts also recommend that you get a copy of your credit report from the three major credit reporting agencies once a year.

Karen M. Kroll is a freelance writer based in Minnesota.

-- Posted: Sept. 23, 2003

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