The increased risk for rising water, caused in part by climate change, has many homeowners thinking about flood insurance. Some who may not have carried flood insurance before are now considering it. Others may be wondering if they have enough coverage. The main question people are asking is, “How much flood insurance do I need?”
Before you buzz past that question, you should know that your homeowners policy does not include flood coverage. As a result, your home and personal assets could be at risk from flood damage if you don’t have flood insurance.
What does flood insurance cover?
What flood insurance covers depends on what provider you get your coverage from. Many people use the National Flood Insurance Program (NFIP), which was created to provide greater access to insurance protection from the devastating financial losses caused by floods.
Backed by the federal government, flood insurance under the NFIP is a standalone policy that provides coverage for a property’s:
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Main structure.
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Outbuildings.
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Contents.
You can insure both residential and commercial properties through the NFIP.
Private insurers also offer flood insurance. This can come as a standalone policy or an endorsement to your homeowners insurance. For some people, private flood insurance can provide broader coverage at a more affordable price.
How much flood insurance do you need: 4 factors
Many factors come into play when you’re deciding how much flood insurance you should get. The value of your property and where you’re located are two important ones, but lender requirements and flood insurance costs can also influence your decision.
Value of your home and contents
One key factor in determining how much flood insurance you need is how much it would cost to replace your home if it were destroyed in a flood. This is called your home’s replacement value, and it can be far different from its market value (or even what your neighbor's homes may have recently sold for).
Similarly, you also want to have enough flood insurance to replace the contents of your home. These are the items that aren’t attached to your home’s structure, like furniture, clothing, bedding, housewares, and tools.
Flood zones and risk
Another important factor in determining how much flood insurance you may need is understanding your risk of flooding. Some factors that impact your flood risk are:
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The local geography.
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Climate change.
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Weather patterns in your area.
Figuring your flood risk out usually takes some research on your part. You may need to look at recent and potential zoning changes or ask your neighbors if they’ve noticed any changes in the amount of flooding your street has seen over the years. You can also talk to the person who sold you the house. Some states have enacted laws that sellers must disclose flooding risks.
Probably the best tool is a flood map for your area. Produced by the Federal Emergency Management Agency, these maps can show you if your home sits in a flood zone that impacts your need for flood insurance.
Mortgage lender requirements
If you have a mortgage on your home, then you need to consider your lender’s flood insurance requirements. This can serve as a baseline to remain compliant with the terms of your loan.
Potential out-of-pocket costs
Your budget is a significant factor in determining how much flood coverage you should have on your home. Premiums can be expensive, so you may have to decide how much you’re willing to gamble that a flood won’t damage your property.
Another out-of-pocket cost is your deductible. That’s how much you’re responsible for covering if you suffer flood damage. Some people ask for the highest deductible possible because it keeps their premium affordable. The flip side, however, is that a larger deductible exposes you to the risk of paying more of your repair costs in a claim.
Finally, you need to keep in mind that sometimes flood damage makes your home uninhabitable. Ask yourself if you could afford to pay additional living expenses if you had to temporarily relocate. This can be a considerable amount in an extended relocation. A policy from the NFIP might cost less, but it doesn’t include loss of use coverage.
How to calculate the right amount of coverage
Determining the right amount of flood insurance requires using math and an assessment of your tolerance for risks. Let’s look at the steps you need to take.
Calculate your estimated replacement cost
What would it take to rebuild your home? Keep in mind you can assume you still own the land on which your home sits. The land itself has value that will not have to be replaced.
Evaluate personal property coverage
Using an inventory video or photos helps to evaluate the value of the contents of your home, including personal property. Keep in mind, the NFIP coverage only replaces items at actual cash value. It also has a limit of $100,000 of “contents” coverage.
Consider additional flood insurance
If the NFIP coverage limit of $100,000 is not sufficient based on your inventory, you will want to increase that amount through private, excess flood insurance. You also should consider including additional living expenses that will not be covered under NFIP.
Top mistakes when buying flood insurance
Buying flood insurance isn’t all that complicated, but there are common pitfalls you want to avoid.
Only looking at NFIP policies
While the NFIP has been and continues to be a popular option for basic flood insurance policies, its coverage does have some limitations. The maximum coverage amount for an NFIP residential flood policy is $250,000 on the main structure. That may not be enough if your home’s replacement cost is higher than that.
Additionally, NFIP contents coverage maxes out at $100,000. Maybe that’s sufficient coverage for your personal belongings, but the NFIP only insures your items for their actual cash value (ACV), not their replacement value. This makes it difficult to replace your personal property if you experience a total loss.
Private flood insurance isn’t as widely available as NFIP policies; however, it usually has broader coverage with higher limits. For example, some private insurers offer flood insurance with loss of use coverage, which helps pay for costs that go above your normal living expenses after a flood forces you out of your home.
Underinsuring a property
Too many homeowners underinsure their homes by basing their coverage amounts on the minimum required by a mortgage broker or not coming up with a realistic replacement cost estimate. You want to insure your property based on its value, your tolerance for risk, and your financial situation.
For homeowners who want to avoid huge premiums, excess flood insurance may be an option. This is an additional policy that can step in to make up the difference if a loss exhausts the limits on your flood policy. Essentially, excess flood gives you an extra layer of protection.
Feeling too comfortable in low risk flood areas
Homeowners who live further away from water sources often assume that they don’t need flood insurance. However, more than 25% of NFIP flood claims come from outside of high-risk flood zones. Worse? Climate change has influenced several variables that cause floods, like rainfall and snowmelt, making floods more common.
How common? According to the National Oceanic Atmospheric Administration, flooding events caused almost $7 billion in damage in 2023.
This is why we like to say flood insurance is for everyone. If you are beginning to think that flood insurance is right for you, talk to your insurance representative about getting coverage that fits your situation. And while you’re at it, look for ways to minimize your flood risk.
