Why Do Some Mortgage Lenders Require Flood Insurance?

Flooding is the most common natural disaster in the United States. In the most flood-prone parts of the country, most mortgage lenders won't finance property unless the owners purchase flood insurance.

Even if your mortgage lender doesn't force you to buy this coverage, however, you might want to consider it. This post explains what flood insurance covers, what it costs, and what you're risking if you go without it.

Flood Damage Is Expensive -- And Not Covered By Homeowners Insurance

Homeowners insurance does not cover flood damage.

If a storm blows your roof off and rain ruins your rugs and furniture, homeowners insurance kicks in. But this only applies to damage from water originating from within your home or directly from the sky.

If water touches the ground before wrecking your house – from rivers, overflowing ditches, flash flooding, etc., your regular home insurer is off the hook.

You can only get flood protection from a flood insurance policy.

Flood Insurance: Who Needs It?

You do, if your property is financed, and it's in designated flood plain.

You might need it even if you don’t live in a flood plain. If a large part of your net worth is tied up in your house or its furnishings, you should definitely consider adding this protection.

An Insurance Information Institute study found that more than one-fifth of claims for flood damage came from people living in low-to-moderate risk areas – folks not required by lenders to buy flood insurance.

The National Flood Insurance Program's web site says that for all practical purposes, “Everyone lives in a flood zone.”

What about disaster relief from the government? That's usually a low-interest loan, which must be paid back.

How Does Flood Insurance Work?

National flood insurance is a government program, and policies are sold only through licensed insurance agents. Flood insurance rates do not vary between insurers.

You can insure your dwelling for up to $250,000, and its contents for up to $100,000. That's the limit for government policies, but private insurers can sell you extended coverage.

Flood insurance has a deductible. You can choose a higher one to get a lower premium. However, if coverage is required by your mortgage lender, it may set maximum allowable deductible for its own protection.

It's important to know that there is a 30-day waiting period for flood insurance; you can’t just buy it once a storm is heading your way.

How Much Does Flood Insurance Cost?

The cost of flood insurance depends on the property location -- how high it is (or isn't) above the 100-year flood level in your area.

If you live in a low-to-moderate risk area, you're eligible for a Preferred Risk Policy (PRP).

You can find your risk (and potential flood insurance cost) by contacting Lallis & Higgins Insurance.

For those in high-risk areas, flood insurance is required by mortgage lenders, and the cost is not negotiable. You should consider this when you shop for real estate.

Cost Of Not Having Flood Insurance

FloodSmart.gov has a really cool flood damage estimator tool that shows how much damage your home might incur at different levels of flooding.

According to the Insurance Information Institute, less than 13 percent of homeowners carry flood coverage, while one-third of all flood-related disaster assistance, which is provided to uninsured residents, went to those not in designated flood plains.

That's a lot of people gambling with the biggest asset they own.

For more information on flood insurance for your home, contact Lallis & Higgins Insurance.

The Mortgage Reports

The federal government's flood insurance program is deep in debt, and the financial burden is flowing to its policyholders. Consumers in coastal areas who feel they're getting soaked by surging premiums are anxiously searching for relief. And some are finding that less expensive private flood insurance options may be available.

The government's National Flood Insurance Program, or NFIP, is administered by FEMA, the Federal Emergency Management Agency. NFIP offers coverage that protects property owners from damage caused by rising water -- a hazard not covered by a standard home insurance policy.

Homeowners in high-risk flood zones have been trying to keep their heads above hefty flood insurance rate hikes that took effect in 2013.

The reform law brought increases in premiums of as much as tenfold -- or worse.

Other options for flood insurance

Private companies that provide flood insurance are few and far between, and their premiums may not be considered affordable when compared with the federal flood coverage.

This goes back to why the federal flood insurance program was created: Many private insurance companies stopped offering coverage for flooding following massive and expensive floods.

A study was conducted in 2011 that found that for private insurers to offer flood insurance, they would have to charge two to three times what the government charges. So….

Big insurance name wades in

Lloyd's of London, the insurance giant based in the United Kingdom, also underwrites flood policies, through another Florida-based company called The Flood Insurance Agency. The coverage is available in more than 20 states, including Massacusetts.

While most people can sustain a partial loss to their property, if their home is indeed washed away, then they have nothing left. Flood insurance is certainly important for those in flood zones. However, if it rains where you own a home, your home can flood. Contact Lallis & Higgins for more information.

Excerpts - bankrate.com