Is identity theft protection worth it?

WE all want to protect ourselves from identity theft.

So when consumers are offered ID theft insurance, by their provider or a third party, when they call to activate their credit cards or through an insert with their card's essential information, many take it up.

But is ID theft insurance worth it?

Which? say that just 3% of their members with ID theft cover have ever claimed on the policy.

Here are the two things we think everyone should know before they decide whether an ID theft insurance policy is right for them.

1. It doesn't cover your fraud losses

ID theft insurance is there to cover the cost of repairing a damaged credit report and that doesn't include any of your cash fraudsters manage to make off with.

Most credit card providers (note: not all) adhere to the Lending Code and FSA's 'conduct of business' rules which mean that, as long as they're not at fault, consumers cannot be liable for more than £50 of financial losses they suffer as a result of credit card fraud.

Even that £50 will be waived by most credit card providers, particularly those that advertise a 'fraud guarantee' (see our credit card security guide for a list of the providers that do this).

So what do those 1,000s of pounds in compensation cover?

Usually, ID theft insurance covers victims of fraud for any losses incurred as a result of an application for credit that's turned down.

That could include legal representation, time off work, travel expenses and sending documents by registered post.

However, between the fact that most incidences of identity fraud will require few or any of those costs and the fact that these policies tend to be full of exclusions makes a good point of suggesting whether ID theft insurance is really worth it.

2. What it does cover you can get cheaper or free

That's not to say that protection against ID theft isn't a good thing, though, just that the insurance is poor value.

Many credit card providers divert card activation calls to salespeople for ID theft insurance firms and the quality of the advice those salespeople offer has been called into question.

One large ID theft insurance firm, CPP, is currently under investigation by the FSA, for example.

Get it cheaper

• Access to credit reports: a statutory report is available from any of the big reference agencies for just £2, free credit reports are widely available with 30-day agency trials and some Capital One credit card customers get two free reports a year (this is no longer offered to new customers from July 2011 except on the World MasterCard).
• CIFAS protective registration: this service, often advertised with ID theft insurance, registers names and personal details on a fraud database to ensure any applications against that name receive further checks. Through CIFAS it's £12 +VAT a year.
• Alerts when your credit report is accessed: Again, some Capital One credit cards offer this for free, or it's available with monthly subscriptions to credit reference agencies: Equifax currently offer an alert within 7 days of a change for just £2.99 a month.

Compared to typical prices

Here are some sample prices for ID theft insurance from major credit card providers:

• Barclaycard: £79.99 a year (from CPP)
• MBNA: £79.99 a year (from CPP)
• American Express: £83.88 a year (from Affinion Intl)

Identity fraud can be distressing for victims or, at the very least, put a serious dent in credit ratings but many protection services can be accessed cheaper directly and policy claim rates are low.

Taking precautions

It's also free to take precautions against becoming a victim of ID theft in the first place.

Experian advise credit card users to protect themselves against ID fraud by not revealing too much information on social networking sites, regularly checking credit reports and bank statements, avoiding writing down sensitive details and keeping online security software up-to-date.

Although a broad range of people become victims of ID fraud, wealthy individuals with disposable incomes and those renting a home or involved in a flat share are the main focus for ID fraudsters because, in the former case, applications are more likely to be accepted and, in the latter case, because details are easy to steal from shared post boxes.

However, less affluent young social housing tenants are also one of the most targeted groups as fraudsters increasingly commit a high volume of low value crimes in order to avoid sophisticated defence systems.

ID theft: the risk

Having said all that, though, is not to understate the very real threat posed by identity fraud.

In April 2011, credit reference agency Experian revealed that the number of identity fraud cases it had increased by 11% since 2009.

19 in every 10,000 credit card applications were found to be fraudulent, 80% of all application fraud attempts.

An October 2010 National Fraud Authority (NFA) study, showed that every fraudster takes over £1000 from each victim, often with catastrophic effects.

A case of ID fraud can take up to 200 hours to resolve and meanwhile the victim's identity sits in the hands of the fraudster.

The study also found that an enormous 90% of participants thought they were at risk from identity fraud but many had done little to protect themselves from the crime and would take a long time to realise they were being duped.

The statistics showed that only 44% of Britons check their bills and financial statements directly with their receipts.

Along with this, an enormous 45% admitted that they never check before responding to a call or an email.

NOTE: This article presents an opinion based on general market research - if you're considering purchasing an Identity Theft insurance policy you should speak with an Independent Financial Adviser to get specific help for your individual situation.