Why you shouldn’t insure against identity theft

As you're no doubt aware by now, the government's loss of Child Benefit data means that if you're the parent of a child under the age of 16, your personal details and those of your family are either lost in the post, or, more worryingly, in the hands of criminals.

So it's little wonder the papers are full of stories about preventing identity theft. And financial services providers haven't been slow to capitalise on the government's latest mishap.

Many offer identity theft insurance' policies or similar services to customers. For £6.99 a month, Royal Bank of Scotland's PrivacyGuard offers regular credit reports, fraud alerts, and up to £10,000 for legal fees "to reinstate your card status". HBOS's IdentityCare policy, for a mere £6.95 a month, does something similar. But are these policies worth buying? The short answer is no.

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For one thing, the risk of identity theft has been hyped up by the government, which is keen to garner support for its ID cards scheme (though Discgate' should make this position untenable).

The most recent government data (from 2006) says that identity fraud costs the UK £1.7bn a year. But delve deeper and you discover a remarkably wide interpretation of what constitutes identity fraud.

For example, the £1.73m a year that prank phone calls apparently cost the police is thrown in, as this is "a crime that relies heavily on false identities". And you thought it just needed a bored teenager with a pocket full of loose change and a payphone.

Even so, there's no doubt that if fraudsters did get their hands on the missing data, they could cause a lot of trouble. They may not be able to access your bank account, but they could open one in your name, or attempt to apply for a loan. But that doesn't mean that you need expensive insurance.

For one thing, you will be refunded any money stolen from your account as a result of identity theft, provided you have not been negligent. And there are plenty of things you can do to avoid being a victim. You should read your bank and credit-card statements every month this is something you should be doing from a budgeting point of view anyway and look out for transactions you don't recognise.

It's also worth checking your credit record every so often, particularly if you've recently moved house. Ignore services promising to send you regular updates for a fee you can get a free copy of your credit report via Annualcreditreport.co.uk, although this involves agreeing to receive advertising emails.

Credit agencies also offer a statutory credit report for £2. You can get this from major agencies, such as Equifax and Experian. For more advice, HMRC has set up a Child Benefit Helpline on 0845 302 1444.