“We aren’t buying that house,” a friend told me over lunch a few weeks ago. His news took me by surprise; the last time we’d talked, he and his wife couldn’t stop gushing about how perfect the home was. It had a large yard for their golden retriever; it had all the high-end updates they craved; it even had a man cave. When I asked him why not, he gave me another surprise. “We couldn’t afford the insurance on it.”
I’ve heard a lot of reasons why people can’t buy a home – they don’t get approved for a loan, they don’t have enough for a down payment, they lose out in a bidding war – but affording homeowners insurance has never been one of them… until now, of course.
Homeowners Insurance Doesn’t Cover Floods
If you’re like most non-homeowners, then you probably assume that homeowners insurance covers everything – damage from a tornado, a fire, a burglary, a flood. Well, you know what they say about people who assume. While you’d have been right about the first three, homeowners insurance does not include flood coverage. This fact gained a lot of publicity in the aftermath of Hurricane Katrina in 2005, when tens of thousands of homeowners found their homes underwater – literally – and learned their insurance providers wouldn’t cover the damage because it had been caused by a flood (this led to a lot of debate, since many of these homeowners didn’t live in a designated flood zone and claimed the damage was caused by wind, not water).
Instead, owners whose properties are in flood zones must carry flood insurance. This is a separate policy, usually backed by the National Flood Insurance Program. According to FloodSmart, the official website of the NFIP, standard flood insurance policies include $350,000 of coverage for single-family homes – $250,000 for the structure itself, and the remaining $100,000 for its contents.
How Much Flood Coverage Costs You
While TV commercials for the NFIP tout flood insurance premiums as low as $129 a year, this is just the bottom of a very complicated scale. Your premiums depend largely on what kind of flood zone your property is located in – low, moderate, or high – and your deductible. In my friend’s case, his dream home was located in a high-risk flood zone; in fact, that particular home’s basement had seen flooding damage from a nearby river three times in the last ten years! His flood insurance quote came back at $3,000 a year, adding an additional $250 a month to his housing costs. When the bank learned this, they recalculated his front-end debt-to-income ratio, and denied his mortgage application.
Why Doesn’t Homeowners Insurance Cover Floods?
Prior to 1968, many homeowners were on their own when it came to flood coverage. While some insurers did provide flood insurance, it was often so expensive as to be unaffordable to most homeowners. That’s why Congress created the NFIP in 1986. The goal is two-pronged:
1. The first goal of the NFIP was to provide government subsidized flood zone coverage, making it affordable for individual policy holders.
2. The second goal was to educate and encourage communities to avoid building in high-risk flood zones, to reduce the number of properties that experience floods.
But not everybody participates in the NFIP. Some communities may choose not to participate, making the premiums for flood coverage in these areas exorbitant. Only 85% of insurers work with the NFIP as well, meaning the company that carries your flood insurance policy may be different from the one that carries your homeowners insurance. However, you don’t need to shop around for the best policy; because flood insurance is backed by the federal government, premium quotes shouldn’t vary from company to company for identical policies.
In July, Congress and the President passed an extension of the NFIP, keeping it alive through September 2017.
Readers, do you carry flood insurance on your home? Do you know type of flood zone are you in?