how-does-identity-theft-insurance-workOn two occasions, I’ve been the victim of a crime that could have resulted in identity theft. The first instance occurred when I was walking down Fifth Avenue in Manhattan and a young girl grabbed my makeup case thinking it was my wallet (she hesitantly returned it to me after I pointed out that fact). The second incident happened while riding a crowded Manhattan subway. A thief lifted my wallet from my handbag and slid it under his newspaper. Luckily, I saw the wallet peeking out from the paper and demanded it back; surprisingly, he obliged.

Both incidents made me stop and think. What if the thieves were successful in stealing my wallet? Could my identity have been compromised? What would I have done?

This is a concern for millions of Americans—according to Javelin Strategy &Research, in 2013 (the most recent data available), every two seconds a new consumer fell victim to identity theft—and one of the reasons some opt to purchase identity theft insurance.

How identity theft insurance works

Victims of identity theft typically travel a long and frustrating road to recovery. They are often left with lower credit scores as a result of fraudulent activity in their name, and they can spend months working to close accounts that were fraudulently opened in their name. Victims can have difficulty obtaining new loans or lines of credit. Depending on the severity of the identity theft damage, the recovery process can take anywhere from a few weeks to several years.

Identity theft insurance cannot protect you from identity theft but it can help reimburse victims certain costs of restoring their identity. It generally covers expenses such as phone bills, lost wages, and notary and certified mailing costs. It also may cover attorney fees (with the prior consent of the insurer). Coverage limits can range from as little as $10,000 to up to $1 million, though most have policy limits in the rage of $10,000 to $15,000.

Many homeowner’s and renter’s policies provide some coverage for theft of money or credit cards—usually $200 in cash and $50 on credit cards. You can also purchase a standalone policy or an endorsement to a homeowner’s or renter’s insurance policy, which can run about $25 to $50 annually.

Some companies also offer restoration or resolution services to guide you through the process of recovering your identity, which can include working with credit card companies, credit bureaus, creditors, and businesses on your behalf to correct any covered identity fraud issues.

Be on the lookout for identity theft

There are a number of ways in which fraudsters can get hold of your personal information. Your credit card information can be compromised in a data breach at your favorite retailer, for example, or a thief could obtain your Social Security number after a data breach at your doctor’s office.

Fraudsters may also use phishing emails and malware attacks to steal your personal and payment information, while other scammers might use more old-fashioned methods, such as “dumpster diving”—rooting through your garbage, looking for your personal information on bills and bank statements.

(Read more: Seven Reasons You Will Become a Victim of Identity Theft)

Here are some tips to help you protect your identity:

  • Lock your financial documents in a safe place, even if they’re stored in your home.
  • Avoid carrying your Social Security card in your wallet.
  • If you’re on Medicare, make a copy of the card to carry with you and black out all but the last four digits of the number.
  • Shred documents that contain sensitive information, including credit card offers, credit applications, insurance forms, and checks.
  • Regularly review your credit card statements for charges you don’t recognize.
  • Monitor your credit report. If you see accounts you don’t recognize, that would be a red flag of identity theft.

If you believe you have been victimized, report the crime immediately to the credit card issuer and to the police. Make sure to ask for a copy of the police report. You will need it if you want to file an insurance claim or report the crime to the FTC for their assistance. Victims of identity fraud can call the Federal Trade Commission at 877-IDTHEFT. You may also want to consider purchasing a credit monitoring product, which will allow you to regularly monitor your credit report for unfamiliar accounts that have been opened in your name.

Loretta Worters is vice president with the Insurance Information Institute, a non-profit organization whose mission is to improve public understanding of insurance—what it is and how it works. Follow her on Twitter: @LWorters.