Flood Insurance: Insuring Your Home

Did you know that homeowner’s insurance doesn’t cover flood damage? Because of this, homes located in a Special Flood Hazard Area (SFHA) are required by lenders to purchase a separate flood insurance policy. However, there are millions of homes at risk that also experience periodic flooding but are not located in the most hazardous zones.

Regardless, any homeowner can purchase flood insurance and the good news is that, for some, rates will be reduced this year.

Starting on Oct. 1, the National Flood Insurance Program (NFIP) launched a new program called Risk Rating 2.0. This program is designed to encourage communities throughout the country to deploy measures that help mitigate potential damage due to flooding. The lower the risk resulting from these efforts, the higher the rating. This means that many homeowners who live in highly rated areas may benefit from lower premiums going forward. However, be aware that there is only one source of insurance sponsored by the government, rates are standardized and payouts are capped at $250,000.

But not to worry, flood insurance also is available in the private market. Private insurers are able to customize premium quotes and the forces of competition help keep premiums reasonable, so it’s a good idea to comparison shop. Private flood insurance policies also offer additional coverage options that the NFIP does not, such as:

• Up to $1 million or more in building coverage
• Enhanced coverage for detached structures
• Replacement cost for contents and secondary residences
• Additional living expenses
• Pool repair and fill
• Business income coverage

If your home is not in a SFHA and you are wondering whether or not to purchase flood insurance, consider how much you can afford to pay out-of-pocket for flood damage. Use this statistic as a guide: 1 inch of floodwater can cause as much as $25,000 in damages to a home.

In other words, paying for flood insurance is kind of like paying a fee to protect your home equity and investment portfolio. Compare a flood policy to buying a warranty for a new appliance. The risk is that the cost of repairing or replacing that appliance would put a strain on your finances. If you apply that same logic to 1 inch of flood damage, you can see that a flood policy would offer a much higher return on the amount you invest in its premium. Since a single flood event could wipe out all of your assets, it stands to reason that insurance is critical for perils that pose high financial risks.

If you still need more data to help decide whether to buy a flood insurance policy, consider the impact that extreme weather events have had on your property in recent years. In many areas, flood damage isn’t caused by a hurricane, but rather by storm surges or heavy rainfall. Even if you haven’t experienced significant events, that could change due to the constantly evolving environment. Rising sea levels and new weather patterns are expected to produce higher intensity flooding from hurricanes and offshore storms.

One way to see the local flood patterns in your area is to visit Floodfactor.com. Navigate the Floodfactor map to pinpoint your home’s exact location, and compare patterns based on past, recent, and projected future weather events. 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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