Everything You Need to Know About Flood Insurance

By Dan Rafter on 25 July 2016 0 comments

You'll have plenty of insurance bills to pay when you take out a mortgage loan to buy a home. Fees for everything from title insurance to homeowners and private mortgage insurance will drain your bank account.

Adding the cost of flood insurance — the National Flood Insurance Program says that the average flood insurance policy costs about $700 a year — isn't appealing. But here's the thing: That annual premium might seem like a small price to pay if your home is swamped by a serious flood. Water can cause thousands of dollars in damage in a short time.

Should you pay extra for this insurance? There is no simple answer. You'll have to determine just how likely it is that a serious flood will drain your savings, and whether you're comfortable betting that your home will stay dry while you own it.

What Is Flood Insurance?

As its name suggests, flood insurance pays out when your home is flooded. You can generally purchase one of two policies, according to the National Flood Insurance Program. The first covers your home for up to $250,000 in damages. The second covers your personal property for up to $100,000. This second policy would, for example, help you replace your flat-screen TV, furniture, and computer if a heavy rainstorm caused your home to flood.

You can only buy flood insurance from an insurance agent, not through the federal government. This coverage is not part of your standard homeowners insurance policy. Don't think that your standard home policy will provide you with any payout should a massive storm put your living room underwater. If you want flood protection, you'll need to pay extra for it.

What It Does and Doesn't Cover

It's important to understand, too, that flood insurance won't cover any isolated water damage that your home faces. According to the National Flood Insurance Program, flood insurance covers you for damage caused by a flood. It doesn't cover any losses from random water damage.

What's the difference here? The program defines a flood as a "temporary condition where two or more acres of normally dry land or two or more properties are inundated by water or mudflow."

That's different from general water damage caused by, say, a water heater that blows and floods your basement or backup from a sewer.

Flood insurance also provides quite limited protection when it comes to basements. Flood insurance will only cover damage to mechanical systems such as your HVAC and electrical systems and to structural elements. This means that TVs, carpeting, or furniture in your basement won't be covered, even if you do purchase flood insurance.

You Might Not Have a Choice

You might not have a choice to make when it comes to purchasing flood insurance. Lenders require that you purchase a flood policy if you are buying a home in a federally designated flood zone. These are parts of the country in which the risk of flooding is especially high. Lenders won't provide you with a mortgage loan in these areas if you don't first purchase a flood insurance policy.

If you don't buy in one of these areas? Then you do have a choice to make. Talk to your insurance agent about whether flood insurance is a smart move for your home. Ask, too, about what your agent's policy actually does and doesn't cover.

You might buy a policy and never use it. But if that downpour comes, you might be glad that you invested in this extra form of protection.

Do you carry flood insurance?

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