Some homeowners don’t have a choice about buying flood insurance. Lenders backed by federal programs – and that’s most of them – require it before approving mortgages for homes that fall within the 100-year floodplain.
That’s because standard home insurance doesn’t cover damages caused by flood. Homes within the 100-year floodplain, despite that benign name, have a 26% chance of flooding over the life of a standard 30-year mortgage. Given that the home is collateral for the loan, it makes sense that lenders protect their investment.
But what if you don’t live in an area that’s perceived to be at high risk for flooding? Your lender likely won’t mandate it. The government won’t mandate it. Only 13% of all U.S. homeowners buy coverage, according to the Insurance Information Institute (III). After 7 years working closely with insurance consumers, it never gets easier to see someone experience a disaster they didn’t purchase coverage for.
The case for flood insurance
Here are some factors you should consider when deciding whether to buy flood coverage:
- · Everyone lives in a floodplain of some sort. True, the 100-year floodplain carries the greatest risk. But the Federal Emergency Management Agency, which administers the National Flood Insurance Program, says 20% of its claims come from areas that aren’t considered high risk. Many more homeowners in low- to moderate-risk areas don’t buy coverage and end up in high water. The III recommends that every homeowner consider flood insurance.
- · It can cost less than you think. Yes, flood insurance for coastal properties and other high-risk sites is expensive. It could get more costly if Congress eliminates the subsidies that keep premiums down. But in low- and moderate-risk locations, policies start as low as $129. The average flood insurance premium is $650 a year, according to FEMA’s floodsmart.gov website. The average flood claim from 2000 to 2012: nearly $42,000.
- · Even small amounts of water can be devastating. According to FEMA, just one inch of floodwater can cause $21,000 in damage.
- · Federal disaster assistance isn’t the answer. If – and it’s not a given – a federal disaster is declared after the flood that damages your home, help generally is available. But it usually comes in the form of low-interest loans. You must repay the loans – on top of your mortgage.
- · You can’t put off the decision until there’s a threat. Most flood-insurance policies don’t take effect for 30 days. That means you can’t wait until a tropical storm starts heading your way to decide that you need flood coverage. Most natural disaster guides recommend taking precautions well before trouble begins, and flood insurance is one way for you to prepare.
Lessons from Colorado
Some remain in disaster denial, dismissing the widespread damage from Hurricane Katrina and Superstorm Sandy as the results of freak storms that primarily affected coastal areas. Those people should think back to September 2013, when massive rainstorms caused widespread flooding in northeastern Colorado. This didn’t happen near the coast and wasn’t the result of a freak storm. Yet the flooding caused an estimated $2 billion worth of damage. State and federal disaster assistance, as of February 2014, totaled only $267 million. Only about 1% of the state’s dwellings had flood insurance, according to FEMA and the Census Bureau.
Peace of mind
No one wants to spend money for something they never hope to use. But no one wants to take on the huge costs associated with flood damage either. That’s why homeowners should weigh their decisions carefully before declining to purchase coverage.