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Is Identity Theft Insurance Worth It?

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With the growing number of identity thefts, given the age of computers and our comfort with electronic commerce, a lot of identity theft insurance companies have been hitting the news lately. Are they really worth it? Is identity theft so prevalent that you would actually need insurance to protect against it? I personally know at least one person who has suffered from identity theft and it cost them quite some money and a lot of their time, easily two or three months of headache and hassle, to clear everything up. Looking at the numbers, is it worth it to pay a company like Lifelock $99 a year for up to $1,000,000 in identity theft insurance? (Many companies and banks offer identity theft insurance but Lifelock appears to have the most bang for your buck from the ones I’ve seen; a bank such as Wells Fargo offers a mere $10,000 in protection for close to $160 a year)

Not entirely sure. According to the FTC, in 2006, the worst state for identity theft was Arizona with 147.8 victims out of every 100,000 persons, or 0.15% chance of being a victim of identity theft. It is also estimated that each victim spends approximately $1,500 and 175 hours to clear their good name. If you estimate that each hour costs $30 (for an annual salary of $60,000), then the total cost is approximately $6,750. Thus, the average annual expected cost of identity theft per person, as measured by probability of being a victim multiplied by cost, is $10.13. Thus, a service like Lifelock is not “worth it” in the strict financial sense.

I poked around the Lifelock website to what they actually offer and they tell you, plain and simple, what they do and the fact that you could do it for yourself for free (I add how in the parenthesis):

  1. Tell each of the credit bureaus to set fraud alerts on your accounts. (You can do this yourself by calling the bureaus and requesting it)
  2. They tell the credit bureaus again every 90 days. (Again, you can do this yourself)
  3. They request your name be removed from junk mail lists. (You can do this free yourself at OptOutPrescreen)
  4. They request free copies of your credit reports. (You can do this free yourself at AnnualCreditReport)
  5. If your identity is stolen, they will spend up to $1,000,000 to help you get it back. This is the only thing you can’t do yourself… well you can self-insure but you won’t have $1M backing you up.

The most interesting thing about the site is the fact that the CEO, Todd Davis, plasters his social security number, 457-55-5462, all over the site. Assuming that is his social security number, that’s a pretty bold thing to be doing and a strong “money where your mouth is” type of statement that I can admire. Of course, that alone isn’t a reason to try the service, doing a calculation like I did earlier, which showed this particular $99/yr service is not worth it, is how you should be making your decision. That being said, putting your social on the web like that is certainly a great marketing ploy.

(Another company that offers a very similar service is TrustedID but it’s $12.95 a month, making it a less attractive offer; but I mention it in case you wanted to get a better feel for the industry. They lack the catchy marketing ploy of plastering their CEO’s social security number on their site.)

Verdict: Identity theft insurance isn’t worth it when you look at the numbers but sometimes it’s about peace of mind. As for me, I won’t be getting it anytime soon unless the probability of identity theft goes up significantly.

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8 Responses to “Is Identity Theft Insurance Worth It?”

  1. I have written a post on identity theft not so long ago and I came with the same conclusion. Basically, identity theft insurance will cover for some sort of “peace of mind” but in fact, the company won’t do much.
    - You are already insured by law regarding your bank accounts, credit cards and other financial product.
    - The company’s assistance is nothing but offering services that you can do yourself.
    - Overall cost of identity theft are minimal. Therefore, you will end up paying $100/years for so many years and when it happen to you, you probably won’t get your money back.

    In then end, the real thieves in the story are the insurance company (is it really surprising?)

    If you want to read the entire article, I posted it on my blog:
    link

    Cheers,
    FB.

  2. Miller says:

    I don’t think you’ll find a single insurnace industry where the expected costs of the the bad thing happening (car accident, ID theft, etc.) is close to equal to the premiums you pay. Remember, the insurance company wouldn’t exist if it didn’t make money! It’s a business, not a public service.

    And of course, insurance companies actually realize the expected value condition because they have a very large sample set (statistically accurate). We, as individuals, will never realize that averaging out effect, so by getting insurance we are paying for (a) peace of mind and (b) more importantly, reducing risk which would put us in a pretty bad hole.

  3. Scott says:

    My uncle was one of those Arizona victims last year. Someone stole a whole stack of his company’s paychecks out of their outgoing mail and used the information on them to open a bunch of accounts. Naturally the criminal is totally liable but here the company was as well for putting information on those paychecks that they should not have. Still was a huge hassle for my uncle though.

  4. mommy says:

    I’ve got LifeLock for peace of mind. I also like that I could add my kids for a nominal fee. Kids are BIG targets for ID theft because it could be years before they ever apply for credit and catch on. Of course, you could just get their free credit reports annually and you’ll keep them safe. I just like the little bit of added security.

    As someone who is constantly telling people to raise their deductibles on insurance based on the cost of insurance argument, buying into the id theft thing is a little bit against my usual fiscal makeup, but now it is one less thing on my “stuff to worry about” list.

  5. Jake says:

    To those who have signed up for Lifelock, perhaps you should read about how shady the co-founder of the company is:
    http://www.phoenixnewtimes.com/2007-05-31/news/what-happened-in-vegas/full

  6. Josh says:

    I found another article about Davis from just last month. It talks about how a guy actually got caught trying to get a loan with Davis’ SSN.

    http://www.star-telegram.com/news/story/180194.html

  7. Tim says:

    yeah, i’m not going to put money and my sensitive information in a company where the co-founder appears to have a history of suspected scams and criminal history, despite the ceo seemingly to be on the up and up given his past work history.

    only three claims paid out is a dang good return for them, considering that you can do everything yourself. i wonder how many claims they have rejected.

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