Renters and homeowners insurance cover a lot of things. One thing that’s notably absent from coverage, though, is flood protection.
It seems strange. Renters insurance can protect against damage caused by other natural disasters, and it will protect against water damage caused by a busted pipe, but homeowners need separate flood insurance to make sure they’re not subject to expensive damage caused by floods.
What’s more, people often don’t know that flood insurance is really only available from one source: the National Flood Insurance Program, a division of FEMA.
If buying a specific disaster-related government insurance policy sounds complicated, don’t worry – it’s easier than it sounds. Here’s everything you need to know about buying flood insurance and getting the best flood insurance rates.
What is the National Flood Insurance Program?
Flood insurance is provided throughout the United States by the National Flood Insurance Program (NFIP). While flood coverage used to be a standard part of insurance policies, it was spun off into its own product in the 1950s because the expensive damage caused by floods just became unaffordable for insurers to sell and homeowners to buy.
That’s why the NFIP was created as part of FEMA in 1968. The incentive for the NFIP was twofold. First, it incentivized flood risk management so fewer people were at risk of flood damage; it also created a large risk pool, spreading out the cost of flood insurance and making it more affordable.
The NFIP was set to expire on September 30, 2017, but a new bill aims to extend the program for another ten years. The bill also increases the coverage amount set by the NFIP and looks to increase private sector involvement in flood insurance so people aren’t entirely reliant on the NFIP.
Who needs flood insurance?
It seems obvious that people who live near coastlines or rivers would need flood insurance, but more people are at risk of flooding than you might think.
Floods are expensive. In 2016, inland flooding was the most expensive weather event. Flooding in Louisiana and Hurricane Matthew both caused over $10 billion in damage, and flooding in Houston caused another $2.7 billion. All 50 states can experience flooding, whether it’s from hurricanes, snow melts, or heavy rains causing flash floods. According to the NFIP, one inch of flooding can cause as much as $20,000 in damage to a building.
Twenty to 25 percent of flood insurance claims come from areas designated as moderate-risk flood zones, so it’s important for most people to be covered. For people in high-risk areas, or people who want to remain eligible for federal disaster aid, flood insurance coverage is mandatory. Some mortgage lenders may also require flood insurance.
Buying flood insurance
Even though flood insurance is provided through the NFIP, you don’t actually buy through the NFIP. You purchase flood insurance through an insurance agent, and the NFIP has a Write Your Own Program where big companies like Allstate and Farmers "receive an expense allowance for policies written and claims processed while the federal government retains responsibility for underwriting losses." Insurers get the business, policyholders can deal with companies instead of the federal government, and the NFIP doesn’t have to spend time on the logistics of handling a nationwide customer base.
There’s typically a 30-day waiting period between when a policy is bought and when it goes into effect, and there are two different types of policies available – those that cover structures, and those that cover property inside those buildings (flood insurance doesn’t cover the land a building sits on, though). Current coverage limits for residential buildings are $250,000 for structural damage and $100,000 for contents, and $500,000 of coverage for both for non-residential buildings.
Besides that, flood insurance works a lot like renters or homeowners insurance. There are premiums that are paid each month; there are deductibles that have to be met before the insurance kicks in; there are coverage limits; and there’s a distinction between replacement cost value policies and actual cash value policies.
How flood insurance rates are set
Since flood insurance is part of the NFIP, you won’t get a better "deal" by going to a different company or agent. The average flood insurance cost is around $700 a year, with people in high-risk areas paying more and people in moderate- or low-risk areas potentially paying less.
Where you are in a flood zone is the main determinant of how much you’ll pay for flood insurance. Like other types of insurance, your deductible and coverage amount also play a big role. Other factors taken into account include:
- The year the building was built
- How many people live or work in the building
- The size of the building
- Where its contents are (it’ll cost a lot more if most things are stored in a basement, for instance)
- Elevation requirements
Flood insurance rate maps
So, the risk of flooding plays a large part setting your flood insurance rates. How do you find out what your risk is?
Flood zones are used to determine how likely it is that land – and the structures on that land – will be flooded. Flood insurance rate maps use this information to help set flood insurance rates.
High-risk flood areas include most coastlines, and could include mountainous areas at risk of flooding from melting snow. These are the areas most likely to have mandatory flood insurance requirements set by either the government or mortgage lenders.
The highest-risk areas are known as Special Flood Hazard Areas (SFHA). They’re measured as having an annual flood risk of 1%, and a 26% chance of flooding over the life of a 30-year mortgage.
Moderate-risk flood areas are those areas that have a 0.2% annual chance at flooding. But, as mentioned earlier, around a fifth of all flood insurance claims come from these areas.
FEMA also designates minimal-risk flood areas, which are below the 0.2% threshold, and undetermined, or unmapped, areas (which are few and far between).
It’s a good idea to know where your home sits before you get a flood insurance quote so you know whether you should expect a high rate or might qualify for a Preferred Risk Policy. If you want to find out where your home sits in a flood zone, use FEMA’s searchable flood map system.
Saving on flood insurance
You may not be able to save on flood insurance by going through a particular insurance company or agent, but that doesn’t mean there aren’t ways to save on your flood insurance rates.
- Flood insurance discounts. The main way go get a discount on your flood insurance is through the Community Rating System, "a voluntary incentive program that recognizes and encourages community floodplain management activities." Participating in the Community Rating System can discount premiums up to 45%. Homeowners may also be able to save money by making sure their house is properly elevated.
- Flood insurance grants. Flood insurance still too pricey? FEMA and the Department of Homeland Security provide grants in the form of Hazard Mitigation Assistance, which, "present a critical opportunity to reduce the risk to individuals and property from natural hazards while simultaneously reducing reliance on Federal disaster funds."
- Flood insurance Preferred Risk Policy. Based on your flood zone and other factors, you may qualify for a Preferred Risk Policy. This can dramatically reduce your cost, as policies can get as low as $129.
Flood insurance might have a few quirks, but in the end it’s no different than any other insurance policy: rather than take a gamble on absolutely nothing bad happening to you, it allows you to shore up your financial safety net and have peace of mind. Even if you have renters or homeowners insurance, look into getting a flood insurance quote so your home – and family – are fully protected.