Is Identity Theft Protection Worth the Cost?

Jun 15

Is Identity Theft Protection Worth it? financial planning investment management CFP independent RIA retirement planning tax preparation financial advisor Ridgewood Bergen County NJ Poughkeepsie NY fiduciary

From credit monitoring and alerts to identity restoration services, finding solutions designed to help protect yourself from identity theft is quite simple nowadays. However, deciding which of these solutions to use isn’t as easy as meets the eye.

This post aims to help simplify the decision-making process to ensure you won’t spend more than you need to on costly services. Let’s dive in!

Identity theft statistics

According to a recent Javelin Strategy & Research report co-sponsored by AARP, nearly 42 million Americans were victims of identity fraud in 2021: an increase of 79 percent from the prior year. The average per-victim loss from traditional identity theft also grew in 2021 from $210 to $1,551. In response to these crimes, victims spent an average of nine hours resolving identity fraud issues.

The National Council on Identity Theft Protection reports that a case of identity theft occurs every 22 seconds in the United States—a number that will only get worse this year!

Identity theft is also widespread; no matter where you live, you can become a victim at any time. However, the Federal Trade Commission (FTC) reports that if you reside in Rhode Island, Kansas, Illinois, Colorado, or New York, you have a higher likelihood of experiencing identity theft compared to people who live in other states.

Types of identity fraud

Identity fraud comes in all shapes and sizes. The most common types of identity theft, however, are related to government benefits (e.g., using your identity to claim unemployment, SNAP (food stamps), or Social Security benefits) and new account fraud (opening new credit, debit, or bank accounts under your name). Other prevalent types include medical and insurance, email and social media, and tax fraud: the latter occurring when a fraudster files a falsified tax return under your name to claim a large refund or you receive a call from scammers posing as the IRS.

Causes of identity fraud

Mass data breaches are one leading cause of identity theft. According to Statista, this issue is on the rise; in the U.S. alone, 1,802 incidents occurred in 2022, almost triple the amount from just ten years ago. While breaches are more common within healthcare, financial, government, and retail sectors, hackers also target social media, utility, and technology companies—meaning no organization is immune. Ransomware (malicious software denying access to a system or data until a ransom is paid) and phishing (a technique used to acquire sensitive data, often via a website or email) are the most common attacks.

According to the Federal Trade Commission, phone calls, texts, and email are the primary contact methods scammers use to target individuals. While social media ranks fifth behind websites and apps, it tops the list with respect to total financial losses.

Do-it-yourself options to protect your identity

With all of these data breaches and hacking, it’s no wonder so many people feel insecure in this current environment. However, before you run out and purchase the most expensive identity theft solution out there, consider the following options: starting with those that will go easy on your wallet.

Credit freezes
Considering that credit card and loan fraud—specifically new account openings—rank among the top fraud culprits, credit freezes are an ideal way to keep criminals from accessing and misusing your financial data.

Also known as a “security freeze,” a credit freeze—once in place—ensures your credit reports are inaccessible to everyone but you, current creditors, and debt collectors. As a result, no one can open new lines of credit or other accounts that require a credit check in your name.

It’s important to know that a credit freeze won’t affect your credit score, and it’s free to either place or lift a freeze across all three bureaus. However, this service does require a bit of effort, as you’ll need to temporarily lift freezes whenever you apply for credit. In addition, a credit freeze helps only with respect to new accounts—meaning it cannot prevent fraudsters from accessing those that already exist.

Credit cards
If you’re not doing so already, use your debit card sparingly—especially if you’re concerned about fraud. For starters, remember that criminals who access your debit card will drain money directly from your checking account. When hackers access your credit card, on the other hand, they’re tapping into the issuer’s money: not yours.

You should also know that all major credit cards offer a free zero-fraud liability policy that protects you from fraudulent charges. Even if your card doesn’t, the most you’d be on the hook for is $50 (by law). Alternatively, depending on the amount of time it takes to report a debit card loss, you may be responsible for the entire amount (eek!).

You should therefore use credit cards instead of debit cards whenever possible, especially when traveling and shopping online. Also remain wary of credit card protection offers, which are often unnecessary.

Credit reports
Your credit report is another free tool you can use to monitor activity on your financial accounts. With this in mind, you should pull your credit report—which is free to do once a year through annualcreditreport.com—from all three major bureaus. A careful review of this report can help you spot errors and catch any sign of fraudulent activity.

Homeowner’s insurance
If identity theft protection isn’t wrapped into your homeowner’s insurance, you can often add this as an inexpensive rider. Not all identity theft policies are created equal, however. At the very least, the policy should cover legal and late fees and provide a specialist to help rectify your situation (recovery). It helps to inquire about coverage for other household members, as well.

Activate two-factor authentication
Two-factor authentication is simply an extra layer of security granting you access to online accounts only after you’ve successfully presented two or more pieces of evidence (often a password and unique code sent to your phone or accessed via an app such as Google Authenticator). Coupled with strong passwords, this process makes it more difficult for hackers to seize control of your online accounts.

More expensive ways to protect your identity

While the tools and resources mentioned above are sufficient for many people, perhaps you’re looking for additional peace of mind—especially if you’ve already fell victim to these crimes and/or are on the older side, as seniors are at high risk for identity fraud.

In general, identity theft protection companies offer three primary services for a monthly or annual fee including:

Monitoring: this feature scans your credit files for new activity.
Alerts: your monitoring service will notify you of any new activity, including new account openings, so you can react quickly and minimize any associated impacts.
Recovery: when you become a victim, these services will help you recover lost money and undo any damage to your credit.

While these services can benefit many, it’s important to keep a few things in mind before enrolling. First, check with your local bank or credit union (or even membership clubs such as Costco and Sam’s Club) as it’s not uncommon for these businesses to offer similar services at discounted rates for customers and members.

Next, you’ll need to provide personal information including your Social Security number and other account information. Therefore, remain aware that these companies themselves are not immune to breaches: as evidenced by LifeLock in 2018 and Equifax in 2017.

You should also know that regardless of what you read, these services can’t prevent identity theft from happening; they can only spot it and then provide assistance in the aftermath.

Finally, keep in mind that these companies sometimes advertise misleading features. For example, while these services can scan for and alert you if your information is viewed on the “dark web”—a corner of the internet only accessible via special software—they can’t remove it.

The bottom line: the value of ID theft insurance

While it’s true that 100% protection from identity theft is impossible, it’s important to maintain at least some level of security. The real question is just how much protection you need, with the answer depending on each individual and corresponding preferences.

Do-it-yourselfers can enjoy a fair amount of coverage for a minimal cost and may not see value in costly third-party identity protection services. However, if you’re looking for greater peace of mind as a high-risk individual, investing in additional third-party services is perhaps the best move for you.