Flood insurance is usually only required if you live in a high-risk flood area and have a mortgage on your home, although it is worth considering even if only one—or neither—condition applies to you. Federal law states that mortgages backed by the government must have flood insurance if the homes are located in Special Flood Hazard Areas (SFHAs). You need be covered for an amount equal to your property's rebuilding cost or to the maximum limit of coverage available to you. Private insurers often require flood insurance for high-risk homes too, though, it's not universal. While you are only required to adhere to minimum coverage, you may want to consider getting more to protect your home and possessions.
Flood Insurance Requirements
If you have a federally backed mortgage like an FHA loan, and live in a high-risk flood zone, you will be required to purchase flood insurance. The National Flood Insurance Act (NFIA) of 1968 and Flood Disaster Protection Act (FDPA) of 1973 created flood insurance requirements for lenders. Together, they stipulate that all mortgage lenders backed by Fannie Mae or Freddie Mac must mandate homeowners to buy flood insurance coverage if the property is located in an area with a 1% chance or more of flooding—sometimes also called a 100-year flood zone. Private lenders will often have similar requirements for mortgage holders in similar areas, though it is not legally mandatory for them to do so. In either case, you can buy a policy backed the National Flood Insurance Program (NFIP) to satisfy the requirements. A flood insurance policy from a private insurer may also suffice, though not every lender will accept it.
Mortgage companies require flood insurance because they have a financial stake in the property. If a house is totally destroyed by a flood, and the homeowner decides to abandon the home and stop making payments, the mortgage lender would be stuck with the worthless property. Requiring flood insurance mitigates this risk for both the mortgage lender and the homeowner.
You are required to have enough insurance to cover the cost of the development of your property or the maximum limit of coverage, whichever is lower.
Guidelines for Who Must Purchase Flood Insurance
|Do You Have a Mortgage?||Flood Insurance Required||Recommended Amount of Flood Insurance|
|Yes||Equal to property development cost or coverage maximum, whichever is lower||Equal to the value of your home and possessions|
|No||None||Equal to the value of your home and possessions|
The cost of development includes rebuilding your home if it is destroyed in the event of a flood. The insurance company's underwriter will determine this figure based on the materials your home was made of, as well as the cost of materials and labor in your area. The replacement value may differ from year to year, as the cost of goods and services fluctuates.
The maximum limit of coverage depends on whether you choose to buy a federal or private flood insurance policy. Coverage from the NFIP typically can't exceed $250,000 for your home's structure and $100,000 for your personal property. Private flood insurers can provide much higher limits. For example, the Homeowners Choice Property & Casualty Co. provides up to $500,000 of coverage to homeowners in South Carolina.
How Much Flood Insurance Do You Need?
Homeowners and renters living in high-risk flood areas should consider how much insurance they need—not just the required amount. You always want your flood insurance coverage to equal the value of your home and possessions so that you'll be reimbursed if the worst happens.
The cost to rebuild your home is based on several factors, including the size of your house, the quality of materials used and the cost of labor in your area. Your home insurance company can likely provide you with an approximate rebuild cost, especially if you have recently purchased homeowners insurance.
Note that your home's rebuild cost is a different amount than your home's market value. Rebuild cost is usually lower than market value, though high demand for labor after a large disaster such as a flood can drive up costs significantly.
Next, come up with the total value of your personal property. Essentially, this includes everything that is inside your home, such as furniture, clothing, appliances and other belongings, though some items, like outdoor furniture and golf carts, may be exempt from coverage.
When shopping for flood insurance, remember that many policies also have individual limits on possessions within a specific category. Instead of focusing on the lump sum of coverage, consider how much you will need to protect your individual possessions by categorizing them. For example, if you have a trading card collection worth $10,000, some flood insurance policies may not pay out enough to cover your loss. Private flood insurers may be better-suited to insure for speciality items like these.
NFIP Limits for Flood Insurance Coverage
- Building Structure: $250,000
- Personal Property: $100,000
- Valuables and Business Property: Up to $2,500 for fine art, collectibles, furs, jewelry and business property combined
- Additional Living Expenses: No coverage
If these limits aren't high enough to cover all your belongings, private flood insurance is likely the better option. Of note, NFIP flood insurance does not provide coverage for additional living expenses, which pays for extra costs like a hotel or apartment if your home is uninhabitable due to flooding. If you live in an area at a high risk of flooding and do not have an accessible place to stay like a family member's house, consider selecting a private flood insurer who provides additional living expenses coverage.
Can I Remove or Reduce Flood Insurance Requirements?
Flood insurance, especially for homes in areas that are located in Special Flood Hazard Areas and are at a high risk of flooding, can be very expensive. There are a few methods you can try to reduce or remove the amount of flood insurance you're required to buy, though they won't all work in every situation.
In general, while these actions may absolve you of the requirement to buy flood insurance, many will also result in your flood insurance premiums being cheaper. We highly recommend flood insurance to any homeowner whose property is at risk of flooding, even if they are not obligated to buy coverage.
Research Insurance Requirements Before You Buy
Home sellers and lenders aren't obligated to inform you of flood insurance requirements ahead of time—it's up to you to verify whether a home is in a high-risk flood zone and requires flood insurance. Before you put any money down to buy a home, check for flood insurance requirements and rates as part of your full inspection, so you know what you'll have to pay once you move in.
Use a Conventional Mortgage
While all federally backed mortgage lenders will require homeowners in high-risk areas to buy flood insurance, not all private lenders will. If you are able, opt for a conventional mortgage, which may have looser requirements for flood insurance.
Petition to Remove Your Flood Insurance Requirement
It's possible that the FEMA flood map incorrectly lists your home as existing in a flood zone. If you believe that your home should not be subject to a flood insurance requirement, you can petition FEMA to revise their flood map so that your house is moved outside the flood zone. Note that this option typically involves paying a surveyor to inspect your home, can cost hundreds or thousands of dollars, and comes with no guarantee that you'll be able to adjust your flood zone.
Check Prices at Multiple Private Insurers
NFIP flood insurance prices are the same at every insurance company, but rates from completely private flood insurance companies may not be. It's worth checking with multiple local flood insurance companies to see who will offer you the most affordable coverage.
Push for Large-Scale Flood Mitigation Measures
Cities like New Orleans have significantly reduced their residents' flood risk by putting active flood control measures into place, such as flood walls or levees. If your neighborhood is at a significant risk of flooding, encourage your elected representatives to explore similar measures in your area. These protections can bring your flood insurance premiums down significantly.