Do You Need Flood Insurance?

A beautiful home, painted brown and white, with trimmed hedges, a manicured lawn and a white mailbox in front.

Looks like this home is far from any bodies of water, so is flood insurance a good option for the homeowners? Consider that flooding occurs in every state and can be caused by snowmelt or even clogged or overworked water pipes.

 Editor's Note: As of July 31, 2018, lawmakers have agreed to keep the National Flood Insurance Program on life support for four more months.

This time, the extension lasts until November 30. Without it, the vital insurance program would have lapsed on July 31, and home buyers who were dealing with lenders who required flood coverage before closing on their mortgages would have been forced to find a policy in the private sector. Owners who currently have NFIP policies would have had to do the same.

According to the National Association of Realtors, the National Flood Insurance Program cannot write or renew flood insurance in 22,000 communities nationwide if it is allowed to lapse. Of course, Congress could always go back and fund the program retroactively. But for all intent and purposes, there would be closing delays, additional costs and other complications.

The latest extension, which President Trump has said he will sign, gives Congress 120 more days to reform the NFIP, which most lawmakers agree is badly in need of repair. But with the November elections approaching, there may not be enough time for them to act, even by then.

Noting that the potential shut down was coming “in the middle of hurricane season, leaving more than 5 million families and business vulnerable,” Sen. John Kennedy, R-La., applauded the extension. “I don’t want people scared every time it rains.”

As did many industry officials – The American Bankers Association urged lawmakers to turn their attention to a long-term reauthorization of the program that includes necessary reforms to ensure sustainability and availability in the future – Sen. Kennedy called on his colleagues not to play politics with the NFIP.

“It’s central to the stability and vitality of the American economy,” he said recently. “We cannot afford to let down the many Americans who depend on the National Flood Insurance Program for protection against natural disasters.”

As usual, stay tuned.

Every homeowner whose loan is touched in one way or another by the federal government must obtain flood insurance if their home is located in an area that is prone to flooding.

That is, if your loan is backed by Uncle Sam — insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) — or sold on the secondary market to either Fannie Mae or Freddie Mac, you are required to carry an 
insurance policy that covers flood, one that is separate and apart from a homeowners’ policy.

My Home Is Safe, Right?

Buyers who escape this edict may want to consider the extra coverage anyway. It could be the 
best insurance you will ever buy, especially at the relatively inexpensive cost. Indeed, even though rates are rising, flood insurance is one of the best deals going.

Don’t make the mistake of thinking your homeowners’ policy covers your home for flooding. It doesn’t. So if your home is damaged by a hurricane, tornado or just heavy rains, you are not covered — unless you have a separate flood policy.

The Cost of Flood Damage

According to the Federal Emergency Management Agency (FEMA), which operates the federally subsidized National Flood Insurance Program (NFIP), flooding occurs practically every day, practically everywhere. And it is costly. From 2003 to 2012, total flood insurance claims averaged nearly $4 billion per year. And between 1978 and July 2013, the NFIP paid out more than $48.1 billion in claims.

Surprisingly, perhaps, flooding is the nation’s most common natural disaster. About 90 percent of all calamities in the United States involve flooding. What’s more, no state is untouched, for floods occur in all 50 states. When people think of floods, they see 20-foot walls of water. But even a few inches of water can cause thousands of dollars in damage.

In areas prone to flooding, there is a 26 percent chance that a homeowner will be hit by a flood of some kind at least once during the life of a 30-year 
mortgage. And flood damage can just as easily be caused from an overburdened or clogged drainage system and runoff from a new development down the street as it can be caused by a major storm. For example, melting after months of heavy snowfalls can last for a week or more. The Great Midwestern Flood of 1993 lasted more than four months, ruined 49,000 houses and caused at least $16 billion in damages.

And because new development changes absorption patterns, a severe thunderstorm with heavy rains also can cause flooding because there is less land to absorb the water, which pools instead of runs off or is absorbed. This kind of flood may last only a few hours, but the damage can still run into the thousands of dollars. Just a few inches of water can cause major damage. Indeed, according to NFIP, just two inches of water can cause $21,000 in damage to a 2,000 square foot home.

Every inch of the country is mapped into one of two risk-based flood areas. By law, regulated and insured lenders must require flood coverage on properties in high-risk areas, where there’s a 1 percent or greater chance of flooding in any given year and a home is more likely to be damaged by a flood than by a fire. Lenders must tell you whether house is in a high or low-risk area. (You can find out the flood risk for your area at

Lenders typically do not require coverage on properties in low to moderate-risk areas. But coverage is still recommended because one in every four claims is from folks residing outside high-risk areas. Indeed, people outside mapped high-risk areas receive one-third of federal disaster assistance for flooding.

Speaking of disaster assistance, realize that it typically comes in the form of a loan that must be repaid with interest. For a $50,000 loan at 4 percent, the monthly payment would be about $240 a month — $2,880 a year — for 30 years. Compare that to a $100,000 flood policy, which is about $33 a month, or $400 a year. And premiums start as low as $129 for a house and $643 for a commercial building. 

Flood insurance, what is it?

Who Should Purchase Flood Insurance?

Don’t make the mistake of thinking your homeowners’ policy covers your home for flooding. It doesn’t.If you still aren’t convinced, consider this: between 2008 and 2012, the average NFIP claim was $42,000. The average cost in 2012 for insurance was $650.

Fortunately, everyone, even renters, can buy a flood policy. The lone caveat is that the property must be in a community that participates in the NFIP, which was created by Congress in 1968 to fill a void in coverage that most private companies did not offer. More than 5.5 million people currently hold flood insurance policies in more than 21,800 communities throughout the country.

You can insure your house for up to $250,000 and its contents for up to $100,000. And there’s no need to shop for rates, either. The NFIP sets all rates, based on the location, type of structure and whether the property has a basement.

Largely because of claims associated with Hurricane Katrina in 2005 and Superstorm Sandy in 2012, the NFIP owes the Treasury $24 billion. That’s the amount the program borrowed from Uncle Sam to pay claims. And as a result, rates are rising.

A 2012 law aimed at shoring up the program called for new rate structures that would insure the NFIP’s financial stability. The new fees are supposed to be more in line with what the open market might charge, or full-risk rates.

But early in 2014, Congress decided that the gap between the government’s subsidized rates and the open market was so great that the increase in premiums needed to be more gradual. New policy holders and borrowers trying to refinance are eligible for subsidized — but rising — rates, and increases in the premiums paid by current holders are capped at 15 percent to 18 percent a year until they reach the full actuarial rate.

Starting in 2016, though, lenders must escrow for flood insurance, just like they do for homeowners’ coverage.

Lew Sichelman is a nationally syndicated housing and real estate columnist. He has covered the real estate beat for more than 50 years.

Comments from users do not reflect the opinions of The BDX and carry no endorsement. All comments are subject to review before they're publicly available. Contact us to report inappropriate comments for review.

Also something to note, there is usually a 30 day wait before the policy takes effect with some exceptions so don't go to your agents office 2 days before the hurricane is expected to hit trying to buy flood insurance like someone tried to do with Irma at my office.
- John from
john wong, April 14, 2018

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