How much flood insurance do I need?

If you take out a mortgage on a house that is in a high-risk flood area, your lender will likely require you to purchase flood insurance. If your mortgage is backed by the government or secured through a financial institution like Fannie Mae and your home is in a special flood hazard area (SFHA), you’re actually required by law to have flood insurance. 

The amount of flood insurance you need will depend on your lender and what type of mortgage you have. Homes with federally-backed mortgages, for example, are required to have enough flood insurance to cover the outstanding principal balance of the mortgage or the maximum limit of coverage available to you. 

When setting your flood insurance limits, don’t assume your lender’s minimum coverage requirements will be enough. Aim to have enough coverage to pay for a full rebuild of your house and to replace all of your personal belongings. 

What are the minimum flood insurance requirements?

If you have a federally-insured mortgage, like a USDA, VA, or FHA loan, and your home is in a high-risk flood zone, you will be required to purchase flood insurance. Same goes for if your mortgage is a “conforming loan” secured by government-sponsored enterprises Fannie Mae and Freddie Mac.  

Your minimum flood insurance requirements will depend on the type of mortgage you have on the home. Loans secured by Fannie Mae and Freddie Mac, for example, are subject to the following minimum flood insurance requirements (whichever is lowest of the three): 

• The outstanding principal balance of the loan

• The maximum amount available under the NFIP for the type of structure you own. For homes, that amount is $250,000

• The insurable value of the property, or the home’s rebuild cost

Keep in mind that there is a good chance your actual flood insurance needs will differ from the coverage minimums required by your lender. The following section will guide you through how to select the right amount of coverage.

How much flood insurance coverage do I need?

If you live in a high-risk flood area, you’ll want to gauge how much flood insurance you’d need to rebuild your house from the ground up and replace all of your personal property. Prior to setting your coverage amounts, find out the following:

• The amount it would cost to rebuild your home. Ideally, the building property coverage in your policy should be equal to the home’s replacement value, not its market value or the outstanding balance of the mortgage principal. The dwelling coverage limit in your homeowners insurance policy is a good barometer of how much flood insurance you’ll need. For something more precise, contact a certified appraiser who specializes in replacement cost appraisals.

• The amount it would cost to replace your belongings. Be sure to evaluate and add up the value of your personal belongings. Setting up a home inventory with property descriptions and prices is an effective and convenient way to figure out the value of everything you own.

It’s also worth noting that your flood insurance needs are going to hinge largely on which flood zone you’re in. A home in a high-risk flood zone may be best served by a more comprehensive private flood insurance policy with higher coverage limits than the more limited NFIP flood policy.

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NFIP vs private flood insurance coverage limits

The National Flood Insurance Program has long been the standard flood insurance provider on the market, and still accounts for roughly 95% of active policies. With NFIP flood insurance, private insurance companies sell the policies and settle claims on behalf of the federal government, but the government is responsible for claim payouts.

But this policy isn’t ideal for high-value homes (exceeding $250,000 in rebuild value) due to the program’s strict coverage maximums. For additional protection, consider something like supplemental excess flood insurance or a private flood insurance policy.

It’s becoming increasingly common for private companies to write and service their own flood insurance. Private flood insurance is a good alternative to NFIP coverage for a few reasons: building property coverage limits can be higher, coverage for personal belongings is more comprehensive, and private flood insurance is often cheaper than NFIP coverage.

Consider excess flood insurance

Excess flood insurance works like this: let’s say you maxed out the full $250,000 in building property coverage, but your home’s actual rebuild value is $350,000. That’s a $100,000 insurance gap that you’ll need to pay out of your own pocket in the event your home is destroyed in a flood. Excess flood insurance essentially fills that gap in coverage.

In addition to increasing your buildings and contents limits, excess flood insurance may also include additional protection like additional living expenses coverage to pay for added living costs like meals and hotel stays after a flood evacuation. If you have coverage through the NFIP and your home is in a particularly high-risk area, excess flood insurance is a smart option.

Who needs flood insurance?

Flooding impacts almost every county in the U.S., so every home that is at or below the base flood elevation (BFE) probably should have flood insurance. 

The BFE is the level that flood waters could rise to during a flood event. Click here to find the BFE for your community. If your community’s BFE isn’t available, the Federal Emergency Management Administration (FEMA) suggests consulting a floodplain administrator in your area for more information.

The FEMA flood map service also includes broader information about what flood zone you’re in. There are a number of different risk areas, but they’re generally broken up into three distinct categories: high-risk areas, moderate- to low-risk areas, and undetermined areas.

• High-risk areas - A high-risk flood zone or Special Flood Hazard Area has at least a 1% chance of flooding each year. Homeowners in these areas with a federally regulated or insured mortgage are required to buy flood insurance. If by chance you have a nonconforming/unregulated mortgage that doesn’t have the flood insurance requirement, you’re going to want coverage anyway. Homes in high-risk flood zones have a 1 in 4 chance of flooding over the course of a 30-year mortgage, according to FEMA.

• Moderate- to low-risk areas - Moderate to low-risk areas have less than a 1% chance of flooding each year, but the possibility is still there. Federally-regulated lenders can’t require flood insurance in these areas, but it’s still highly recommended.

• Undetermined-risk areas - These are areas that haven’t been mapped out by FEMA. This creates a degree of uncertainty around the home’s risk, for both residents and insurance companies. If you live in an undetermined risk area, consult your lender or local floodplain administrator for more information about flood risk in the community.

Can you reduce or opt out of flood insurance requirements?

Flood insurance can be prohibitively expensive in the most high-risk areas, so if you’re wondering how you can minimize or opt out of flood insurance requirements, you’re probably not alone. Fortunately, there are a few things you can do to lower the cost of coverage or potentially become exempt from flood insurance requirements.

Change your flood zone designation

If you believe the NFIP incorrectly determined that your home was in a Special Flood Hazard Area, you can submit an application to FEMA to request a change in flood zone designation. 

Once FEMA reviews the request, they will issue a response either denying or accepting the map change request, also known as a Letter of Map Amendment (LOMA). If the map revision is approved, be sure to show this document to your lender to have the flood insurance requirement removed. 

Consider private flood insurance 

As we touched on earlier, private flood insurance is often cheaper than NFIP coverage, not to mention the coverage itself is superior. If you’re looking for cheaper insurance alternatives, your best bet as always is to re-shop your insurance.  

Refinance into a nonconforming mortgage

If you have a government-backed or conventional mortgage on your home, your lender is typically required by law to require flood insurance. That isn’t the case, however, with home loans that aren’t required to meet Fannie and Freddie guidelines, or nonconforming mortgages. 

If you’re looking for a mortgage with less strict standards and insurance requirements, or you’re planning on refinancing anyway, look into a nonconforming mortgage with a private lender.