Flood Insurance: What Homeowners Need to Know
September 14, 2021 Author: Tess Downing, MBA, CFP®, Complete View Financial
As a homeowner, it’s natural to assume that flood damage is covered under your homeowner's policy. To an extent, there are some cases in which this is correct, at least to some degree. If lightning strikes and causes water to pour through your roof, for example, that is typically covered by your existing policy. However, if torrential rains cause rising water to flood your basement, that is not covered by a traditional homeowners policy.
Homeowners who live in moderate- or low-risk areas may choose to forego flood insurance, but the numbers paint a very different picture. According to the Federal Emergency Management Agency (FEMA), just an inch of water can cause up to $25,000 worth of damage to your home, and 20 percent of all flood claims are filed in low to moderate flood risk areas.1
In this guide, we’ll review what you need to know and cover some basic tips for protecting your property from whatever Mother Nature may have in store.
Determining Your Flood Risk
You may be aware that you live in a high-risk, moderate-risk, or low-risk flood area. But what do those terms actually mean?
High-Risk
Living in a high-risk area means that there’s at least a one percent chance that the area you live in will flood every single year. That doesn’t sound like much, but it does mean that you—and your insurance—need to account for this. Over a long enough timeline, the unlikely becomes inevitable. Living in a high-risk area means flood insurance is required by your mortgage lender.
Moderate- and Low-Risk
Living in a moderate-to-low-risk area means that there’s less chance of annual flooding. While flood insurance isn’t required, it is recommended.
Unknown Risk
In some areas, flood mapping hasn’t been conducted. Because there isn’t any information, it’s still recommended that you obtain a flood insurance policy if you live in one of these areas to further protect your property.
How Do You Obtain Flood Insurance?
Flood insurance is provided through the National Flood Insurance Program (NFIP). While you can obtain coverage through your insurance agent, flood policies are backed by the federal government.
When you purchase a flood insurance policy, there is typically a 30-day waiting period before your coverage goes into effect. The notable exceptions to this rule are if you’ve added or modified your mortgage and your flood coverage is a part of your mortgage or if you are modifying your existing flood insurance policy during policy renewal.
Much like other types of insurance, your flood insurance policy would renew on an annual basis. If you cancel your policy, you will remain covered for 30 days after your policy expires. However, if you incur any losses during this time frame, they will only be covered if you pay and renew your flood policy before the 30-day grace period expires.
Flood Insurance for Homeowners
There are a few different types of flood insurance policies, depending on your needs.
As a homeowner, you’ll need a policy that covers your home and everything inside it. Commonly referred to as structure and belongings coverage, these coverages need to be purchased separately and there are separate deductibles for each policy. Residential properties can be insured for up to $250,000 for the structure and belongings can be insured for up to $100,000. If you live in a low-risk flood area, ask your insurance agent if there are discounted insurance rates available to you.2
If you live outside of a high-risk flood area and want to purchase a flood insurance policy, the NFIP has a Preferred Risk Policy (PRP) that will combine your structure and belongings coverage into one policy. However, each type of coverage still has separate deductibles that must be met.
Flood Insurance for Businesses
Commercial flood insurance is much more extensive. Policies cover the building, equipment inside, inventory and even your building’s foundation. Much like a homeowner’s policy, structure and belongings policies are purchased separately. You can insure your business for up to $500,000 for the building and up to $500,000 for the contents inside the building.2
What to Do Before a Flood
You can’t control when or how a disaster will strike, but you can take preemptive measures that will help you prepare long before floodwaters reach your door.
Step #1: Confirm Your Flood Risk
Even if you think you know what the flood risk is to your property, it never hurts to double-check. The Flood Map Service Center allows you to enter your address and confirm up-to-date flood risk information. You can also confirm this information with your insurance agent.
Step #2: Purchase a Flood Insurance Policy
We tend to only think about things like flood insurance when a disaster is imminent. Unfortunately, if a major storm is headed your way, it’s likely too late to purchase a policy. Work with your insurance agent and do a check-up of your current coverage to make sure that you’re properly protected.
Step #3: Conduct a Home Inventory
Taking a complete inventory of all your household items is a smart move in general. A written inventory with photos helps with estate planning and any other insurance policies you have, and, of course, it will come in handy should you experience loss due to flooding.
Step #4: Keep Your Documents Safe
Protect important documents by storing them in a safe place. In addition to storing physical copies off-site, digital copies will help ensure that if you’re dealing with flood losses, you have everything you need. Keep all your important documents in a waterproof safe.
This includes documents such as:
- Passports
- Birth certificates
- Marriage certificate
- Divorce papers
- Adoption papers
- Medical papers
- Insurance documents
Step #5: Prepare Your Home for a Flood
While you can’t waterproof your basement against the dangers of floodwaters, you can install a water alarm to alert you to any potential water damage. It’s also a good idea to install a sump pump, complete with a backup generator to keep it running in case power goes out. Keeping your gutters clear can also help divert rainwater away from your house and prevent any type of standing water from collecting on your roof.
If a flood is imminent, move your belongings and furniture to the highest level of your home if it is safe to do so. However, remember that your physical safety is the most important thing in a flood.
While you can’t control the weather, you can help protect your home and belongings with the right flood insurance policy. Flood insurance is a federally backed program that covers what your homeowners policy does not. Talk to your insurance agent today to make sure that you have this important coverage in place, long before disaster strikes.
1 https://www.floodsmart.gov/flood-insurance-cost/calculator