insurance

Do you need insurance for identity theft?

A number of insurance companies are hoping to cash in on consumer fears of identity theft.

Many people do in fact fall victim to the crime. More than 11.6 million adults in the United States dealt with identity fraud in 2011, up 13 percent from the previous year, according to a recent report from Javelin Strategy & Research.

To help ease consumers' anxiety about identity fraud, some insurance companies are offering identity theft insurance. However, it's a frequently misunderstood product.

What identity theft insurance covers

The term "insurance" may lead some consumers to believe identity theft policies will reimburse them for any funds that are stolen as a result of identity fraud. While these policies are in fact insurance products, they often don't conform to what consumers traditionally think of as insurance, says Michael Barnett, executive director of the Identity Theft Protection Association. In his opinion, ID theft policies are more like "expense reimbursement programs" than insurance.

"If you are in a car accident, then your auto insurance covers losses, which are typically the costs to fix your car and any injuries you suffered," says Denis Kelly, president of IDCuffs.com. "Identity theft insurance doesn't pay for the costs to fix your identity or the injuries you suffered as a result of being victimized; rather, it pays the equivalent of the cost to have your car towed and possibly the shipping costs of a new bumper."

Identity theft insurance may cover expenses such as phone bills, lost wages, notary and certified mailing costs, and even attorney fees, according to Michael Barry, a spokesman for the Insurance Information Institute. Some companies, generally not insurers, also offer restoration services to guide victims through the process of restoring their identity, he says.

Where can you get ID theft insurance?

There are plenty of options for purchasing identity fraud policies. Produced and underwritten by insurance companies, they are sold through insurance agents, credit bureaus, identity theft protection companies, credit card issuers, banks and credit unions, Barnett says.

In most cases, your homeowners or renters insurance will cover theft of cash up to $200 or credit cards up to $50, but some homeowners policies now include coverage for identity theft as well, Barry says. If identity theft insurance isn't included with your homeowners policy, it can often be added for about $25 to $50 per year.

How does it work?

Identity theft insurance will reimburse a policyholder for expenses incurred to restore his or her identity, up to the limits stated in the policy. Coverage limits can range from $10,000 to $1 million, according to Barnett.

While such high limits may sound generous, it pays to scrutinize the coverage terms. "Informed consumers must look beyond the marketing claims of coverage of $10,000, $25,000 or even $1 million, and carefully read the fine print to understand the terms, conditions and exclusions," Barnett says.

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