How much does flood insurance cost?

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• Flood insurance rates are set by the NFIP.
• Flood insurance may be required depending on which flood zone your home is located in.
• Flood insurance covers natural events. Water backup riders cover other water damage.

I had searched for homes for months when I found the perfect property. It was rural and wooded, with a small river spilling into wetlands. But my joy over finding a property near the water was clamped down with an instant concern: how much does flood insurance cost?

I was quoted about $700 a year when I consulted a local homeowners insurance agent. However, an area more prone to flooding could be much more costly. Luckily, when I got my flood certification back, I was not in a high-risk flood zone.

Unfortunately, your mortgage company may require you to buy flood insurance. There are no exceptions for cost. More importantly, rates are set by the government. So running quotes with different insurers won't get you a lower price.

Flood insurance is expensive because flood recovery costs are expensive

On average, most homes' flood insurance premiums fall between $700 and $800 annually for flood insurance. However, some flood insurance policies cost $1,500 a year or more on top of your regular homeowners insurance premiums and any other specialty coverage for your area (think hurricane, earthquake, etc.). As anyone purchasing in a flood-prone area can tell you, a good home can go from reasonable to unaffordable in seconds if flood insurance is required.

"The premiums are expensive because flood damage is expensive," to repair, says Jesse Cunningham, a licensed insurance agent. For example, just 1 inch of water in a home can cause $25,000 in damages. But, you may think, wait a minute, doesn't water backup coverage cover the same damage? In a way, you'd be right. So why is water backup coverage so cheap while flood insurance is so expensive?

Flood insurance covers community-wide events

During a year living in Australia, I watched from my balcony as the Brisbane River spilled its banks, then receded, leaving a wake of crumbled bridges, broken power lines, and thick, smelly mud coating everything.

It was my first time coming face-to-face with the destructive power of floods, which cause an average of $4.8 billion in damage each time they strike. With such an impact, it's no wonder flood insurance is so expensive. It's so pricy that homeowners insurance doesn't cover floods.

"Flood damage is too expensive to cover," says Cummingham.

Individually, a flood claim may be reasonable for a for-profit company. However, when you're talking about the whole city of New Orleans flooding in hours, suddenly, an insurance company has to pay claims on what could be its entire customer base. More than one small insurer has gone bankrupt in these situations leading even large insurers to bristle at the idea of offering flood insurance coverage.

As such, the government has stepped in to bridge the gap. "It provides insurance through the National Flood Insurance Program, a partnership between private insurers and the federal government," says Evan W. Walker, an attorney who regularly litigates flood insurance issues.

Private insurance companies quote, sell, and collect premium payments on the policies. These companies then collect a fee from the NFIP for policies sold. However, in the event of a claim, the NFIP would pay out.

The NFIP dictates which homes need flood insurance coverage

The Federal Emergency Management Agency (FEMA) draws flood maps, indicating the risk of flooding in certain regions. Properties with a 1% or higher chance of flooding each year are considered high risk. A 1% risk creates a 25% chance the property will flood during a 30-year mortgage loan.

Flood insurance is written into Fannie Mae, Freddie Mac, VA, and other federally-insured mortgage requirements. However, many private investors will follow suit because they recognize the risk of any significant flooding event. While you might think to look out for coastal areas if you're looking to avoid flood insurance, it isn't always so clear-cut. You might be surprised to find out where the highest-risk flood zones are. The NFIP's flood maps are the best data source for this purpose.

The one exception is if you live in a condo. Condo owners should still invest in water backup coverage to cover broken hoses, plumbing leaks, and other similar events. However, a condo association's master insurance policy (the insurance covering the whole building) includes flood insurance.

How much flood insurance should the American homeowner buy?

The basic NFIP policies you might see have two levels of coverage for American homeowners:

• Up to $250,000 for the building structure, including electrical systems, heating, and other utility-related expenses (the equivalent of the coverage A dwelling coverage on your homeowners insurance policy).
• Up to $100,000 to cover contents, including furniture, technology, and other personal items (equivalent to your personal property coverage on your homeowners insurance policy).

For larger homes, $100,000 to $250,000 may seem insufficient, and homeowners thinking this would be right. "Most people are underinsured," Walker says.

So how do you ensure you're adequately covered with flood insurance? You can purchase additional coverage from private insurers selling supplemental flood insurance. Just keep in mind these policies are often costly. If you're taking out a mortgage, extra flood insurance will also limit the amount you can buy). However, additional coverage could save you quite a bit after a significant flood.

The NFIP might lower your flood insurance premiums

Light may be on the horizon if you've paid expensive flood insurance for your dream home. The National Flood Insurance Program is using a new way of calculating flood insurance costs as of 2021. The policy is known as Risk Rating 2.0, and it's designed to make flood insurance coverage more accessible (affordable).

23% of policyholders affected by the policy saw decreased premiums. Other premiums stayed the same or increased.

Are there other ways to reduce flood insurance costs?

"There's no way around it: flood insurance is expensive. That's particularly taxing when the coverage is required in order to get a mortgage," Walker says.

There are some ways to reduce your flood insurance premiums, including:

• Opting for a higher insurance deductible. Remember that you'll have a higher out-of-pocket cost when a flood strikes.
• Getting an elevation certificate. This shows where a building sits in relation to flood waters.
• Retrofitting your property with items like floor openings that reduce the damage from floods.
• Living in a city or town with a community rating system, grants, and other financial support to help residents manage the cost of flood insurance.

Flood insurance can put a dent in your budget. But, considering floods are one of the most widespread natural disasters, the peace of mind these policies provide is often worth every penny.

Read the original article on Business Insider

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