Now that we’re in hurricane season (June 1- November 30), let’s talk about Flood Insurance.
Some of the things I hear most often from Buyers are “I hear that flood insurance is VERY expensive”, “the house I’m looking at isn’t in a flood zone so why should I carry it?” and “Since I’m paying cash I’m not required to get Flood Insurance so I’m not going to”. Let’s talk about the pros and cons of Flood Insurance. First of all, I think we all agree that it’s an annoyance. Yet another thing to pay for.
The national average premium for flood insurance is $700 per year. In Fort Lauderdale, flood insurance on a typical 100’ waterfront home on the East side of town is approximately $875 per year. OK, that means that we’re 1.25 times the national average. The average claim nationally in the past 5 years has been about $42,000. So using that same equation, that means that the average claim in Fort Lauderdale is about $52,500. The figures I’ve used are for a primary residence which is defined as a location where you (or your spouse) will live for more that 50% of the 365 days following the effective date of the policy. The days don’t have to be consecutive either. There’s usually a surcharge of approximately $250 if this won’t be your primary home. That’s still not bad! So it doesn’t look like I’m shilling for the insurance companies: I’m not forgetting that there is a deductible of about $5,000 on this kind of policy and a 30 day waiting period from the time you purchase the policy until the coverage goes into effect.
What about if your home is not in a designated flood zone? More than 20% of all flood claims are for homes not in a flood zone! Extra heavy rainfall can cause a flash flood in any neighborhood anywhere, even those not in flood zones. The good news is that Flood Insurance in non flood zone designated neighborhoods is less expensive!
If your home is in a designated flood zone (FYI- if your home is on water it’s in a flood zone) mortgagors will usually require you to have Flood Insurance as a condition of your loan in addition to the homeowner’s policy they require. Why? Because homes in these neighborhoods are more likely to experience a flood than a fire, so your friendly banker is going with statistical evidence. Since most lending institutions aren’t in the mortgage business, the only thing they’re getting from your Flood Insurance policy is the knowledge that if there is a flood, there will be money there to get your family’s life back to where it was pre-flood so you can continue to make your mortgage payments. Think about the people who had Flood Insurance after Hurricane Sandy in 2012 and those who didn’t. While there is (limited) Federal disaster assistance it’s usually in the form of a loan that has to be paid back with interest. So even if you’re paying cash, in 30 years the average $875 per year premium will have cost you $26,250 which happens to be exactly 50% of the $52,500 claim example I used earlier.
While flood insurance can seem like just another unnecessary thing to pay for or a way for insurance companies and mortgage lenders to part you from your money, just ask the people in Houston and Chicago this week. I’ll bet that those that have it are glad and those that don’t now wish that they did.
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