Do I have to have my flood insurance cover the amount equal to the cost of my new home?

Question

Can I just pick the lowest amount of coverage? Say my home costs 72,000 can I get the insurance that will cover up to 35,000 in damage to the building? I have to have flood insurace if I buy this house because its in a high risk flood area, however it is supposed to be coming out of the flood plain later this year, so I really just want the flood insurance that will cost the least. Any adivce?

Answer 1

No. Actually, in some cases, you can't do that.

Flood insurance is funny - it's completely controlled by the National Flood Insurance Plan, a division of FEMA. You HAVE to follow their rules.

You cannot just insure for the "lowest amount of coverage", aka, the mortgage balance on the house. You will have to insure for 80% of the replacement value of the house (you do NOT have to insure contents!), but there is a maximum dollar amount that you can insure - I THINK it's $250,000 for a single family home, but it's been a while.

You can't just pick $35,000 to insure the house (say, the loan balance) because the flood policy has an 80% coinsurance clause. That means, if you only partially insure the house, they only partially pay the claim. So, if you had a claim, with $40,000 of damage, they would pay . . . not $35,000 less your deductible, but closer to $20,000 which leaves the bank holding a note on a house that YOU can't afford to repair, and they don't want to end up owning it!

Flood rates and terms are set by the federal government, so there isn't any negotiation room.


**Also. Check with your mortgage company. Just because your area *might* be re-rated (ok, it will LIKELY be rerated, but that doesn't mean you won't be in a 100 year flood plain any more!), that does NOT change the original terms of the mortgage. So if the ORIGINAL mortgage terms require that you buy flood insurance, THOSE TERMS DON'T CHANGE WHEN YOUR AREA IS RERATED. You'll have to get another mortgagee, if you're not going to be in a 100 year flood zone. Additionally, if you DO decide to change mortgages, keep in mind that when you CANCEL your flood policy, you do NOT get a refund on any unearned premium, unless you can prove you sold the house. Being changed from a flood zone A to a B, meaning you don't "have" to carry flood insurance, does NOT allow you to cancel the policy and get any kind of refund, and you are NOT eligible for a re-rate until the renewal date.

Answer 2

If you already have a Homeowner's Policy and are looking to add this coverage to the policy, you will be hard pressed to find a company that would be willing to insure less than full value. Even if you could they would certainly add a Co-Insurance clause. Even then the savings between $72 000 and $35 000 would be minimal. If your home is in a high risk flood area, why gamble with your familiy's future? Any real flood would make your house uninhabitable to the point where it would have to be demolished and be rebuilt. Unless you have $37 000 lying around somewhere to make up the difference, it's not worth it.

Answer 3

You do not have to have coverage equal to the cost of your home. It just means you can only claim as much as you have insurance for. However, if you have a mortgage or a lender is involved, you can expect them to require you to have insurance for the full value.

Answer 4

If you are obtaining a mortgage, you may wish to ask your lender what their requirements are. Sometimes it takes awhile for the property to be on record (on the flood maps) as not in a flood zone.

Answer 5

penny wise pound foolish.
if you save a few pennies by cutting your coverage you are taking a big risk with a big investment.
do you have to do anything,no.

Answer 6

you should have it for full replacement value.