Flood insurance is a timely subject given the tragic impact of Hurricanes Harvey, Irma, and Maria in 2017. With another active hurricane season being predicted for 2018, it is important to consider buying flood insurance. But before you can make a flood insurance decision that’s right for you, you must first understand what flood insurance is, and what is and isn’t covered by our various other insurances. Here are some important questions to ask before buying:
First and foremost, the majority of renters’ and homeowners’ insurance policies DO NOT cover floods. This may come as a shock to many. There are some circumstances where damage related to water is covered by homeowners’ and renters’ insurance. For example, if a pipe were to burst in your home you would be covered; you also would be covered if wind from a hurricane ripped off your roof, allowing water to get into your house. However, the normal damage caused by rising waters from rain and tidal flooding events are only covered by flood insurance, which must be purchased separately.
Now that we know this, we need to decide if it is worthwhile to carry flood insurance. Here are some questions to ask before buying flood insurance.
Does My Mortgage Require Flood Insurance?
If you have a federally backed mortgage, you are required to carry flood insurance, so it isn’t even up for discussion. Even if the property is in a moderate to low-risk area, a private lender can still require it even though federal law does not. In these cases you either carry it or you don’t get a mortgage.
What Is My Risk Tolerance?
The question of risk tolerance may seem like more of an investment question, but it also pertains to insurance. If you are a high risk tolerance person, you may feel like it just isn’t worth it to pay premiums for something you may never use. Others may feel more at ease knowing they would be covered even if there is only a .001% chance of a flood. A cost/benefit analysis that considers premiums, the probability of occurance, and the potential cost of damages will help you decide.
Does My Area Normally Flood?
If your neighborhood has flooded before, how bad was the flooding? This will help you decide what the probability may be that a flood could occur. You may find that the area has never flooded in the past and there is a very small chance it could ever occur in the future.
Does that mean you shouldn’t buy flood insurance? No. It just means you have to understand that it is very likely you will pay premiums and will probably never make a claim. Some will see that as a waste, while others will be comforted by the fact they had it just in case.
To confirm whether you live in a flood hazard area, you can visit the FEMA.gov website, type in your address, and view the FEMA flood insurance rate map (FIRM) for your neighborhood.
Understand your flood risk by looking up your address on the FEMA Flood Map.
Can I Self-Insure For Floods?
Finally, a thorough financial review should be done to see if self-insuring is an option for you. This means you have enough in assets or income that if something catastrophic were to occur, i.e. you were to lose your home, you have a high enough net worth that you could replace it yourself without having to file an insurance claim. Only a small percentage of people will find themselves in this enviable position.
Where Can I Get Reliable Flood Insurance Information?
Floodsmart.gov is a great starting point to begin reviewing information on floods and flood insurance. Here you will find a helpful overview of the National Flood Insurance Program, and its mission to mitigate the impact of flooding through affordable insurance and floodplain management regulation.
Some topics covered include:
What to do if you don’t have flood insurance.
How to buy flood insurance.
How to change or renew your flood insurance policy.
What you need to know about flood plain maps.
What to do if your home or business gets flooded, and
Steps you can take to reduce flood damage.
Click here to find out what flood insurance covers.
Click here to see what a standard flood insurance policy looks like.
Click here to read about flood insurance property coverage.
If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.