Importance of flood insurance
The National Flood Insurance Program (NFIP) was created in 1968 in response to the alarming rate of uninsured victims of flooding events. Given that the typical homeowner’s policy does not cover flood events, the government stepped in and created a program that would make flood insurance not only available, but affordable.
Currently, there are over 5.5 million flood insurance policies in effect in the U.S., and as of the end of 2010, the NFIP has paid over $36 billion in claims and costs since 1978.
The fact: Floods are the number one natural disaster in the U.S. so the importance of flood insurance can never be overstated.
Flood Insurance vs. Disaster Assistance
Many uninsured victims of a flood event find themselves eligible for disaster assistance. What most folks don’t understand is that disaster assistance is not a replacement of insurance, nor is it a gift. Disaster assistance is a loan, to be paid back monthly with interest. Here’s an example used by floodsmart.gov to illustrate the difference between the cost of flood insurance and a disaster assistance loan:
For a $50,000 loan at 4% interest, your monthly payment would be around $240 a month ($2,880 a year) for 30 years. Compare that to a $100,000 flood insurance premium, which is about $400 a year ($33 a month).
There truly is no comparison, in neither cost nor benefit.
If you read the document Importance of Flood Zone Information, you understand that everyone lives in a flood zone. The difference between zones is relative to risk. High risk areas are labeled A and V zones, while moderate-to-low risk areas are denoted as B, C, and X.
Unfortunately, the most common way that flood zones are differentiated is relative to the mandatory purchase of flood insurance via a mortgage transaction, i.e. if you take out a mortgage on a structure that is located in Zone A or V, flood insurance is going to be required. This is unfortunate for two reasons in that 1) property owners that lie just outside the Zone A or V go uninsured, and they end up representing one-third of those that receive disaster assistance, and 2) property owners without a note are not often educated as to their risk.
Just because you’re not required to pay flood insurance is not indicative of its need. Therefore, understanding where you are in relation to the nearest high-risk area is critical.
Obtaining Flood Insurance
Even though flood insurance is underwritten by the federal government, obtaining flood insurance is as easy to purchase as any other types of insurance.
It’s also very important to note that rates and commissions are standard. In other words, no agent writing a standard NFIP policy in Montana makes any more or any less than an agent writing a policy in Nebraska, and the same goes for the cost of insurance policy itself. It’s all standardized by the government, written through the same program – the National Flood Insurance Program.
What a Standard Insurance Policy covers
The best way to address this lengthy topic is to provide a link to a resource that best defines it all.
Here is a link to FEMA document F-679, NFIP Summary of Coverage.
Options for Property Owners
If you are faced with the purchase of flood insurance, either by a mortgage lender enforced requirement or based on your own investigation or experience, there are options that may be available to you.
Letter of Map Change
This is an option for those property owner that find themselves located in high risk area on the FEMA flood map, but they have elevation data to support that a flood insurance requirement may be waived upon its formal review. Fortunately, FEMA has created an efficient process for removing structures that are naturally elevated or have been properly elevated with the placement of fill – a Letter of Map Change (LOMC). The process of obtaining a LOMC involves a formal application process and requires elevation data (see below: Elevation Certificate), but the cost of the required documents and fees can be minimal compared to the cost of flood insurance premiums for the duration of the applicable loan.
An Elevation Certificate (EC) is often required before a flood insurance policy can be issued. Believe it or not, this can be a good thing, as the data shown on the EC may afford you substantial savings – your premium amount can even be less than a policy written in a lower risk zone. In addition, the EC can be used in support of the LOMC process referenced above.
Preferred Risk Policy
Structures that have recently been placed into the 100-year flood plain as a result of newly revised flood maps may be eligible for a Preferred Risk Policy for up to two years. Preferred Risk rates are substantially lower than standard rates.
Grandfathering allows property owners to purchase flood i nsurance policies relative to the flood zone that was applicable at the time the structure was constructed. If all additional requirements are met, Grandfathering can afford substantial savings to the policy holder.
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