Why Dropping Flood Insurance Isn't Worth the Risk
It happens with every severe storm: news footage shows owners with demolished homes who lack the flood insurance to recover.
Many owners did have coverage, says Howard Kunreuther, a University of Pennsylvania flood insurance expert, because most mortgages require borrowers with homes in high-risk areas to carry a federal flood policy.
But after a few years, some drop the policy because they’re “overly optimistic, and don’t think (a flood) will happen to them,” he says. Although mortgage companies should monitor to ensure borrowers keep coverage, some drop it without being detected, he adds. Other research shows that some owners drop coverage because they find it difficult to afford.
This year, average annual premiums for all federally backed policies average about $900, according to Insurance Journal. But there’s considerable variation in federal flood premiums, depending on the state and whether an owner’s home is in a high hazard zone.
In other cases, owners are switching from federal insurance to a policy from a private company.
“Most private companies do not yet offer flood insurance, but that is changing as many more companies are choosing to offer it,” says Matt Chamberlain of the actuarial advisory firm Milliman.
In recent research, Milliman found that a majority of single-family homes in three states – Texas, Florida, and Louisiana – could see cheaper premiums with private insurance.
It’s worth checking with an agent – the only way to buy a federal flood policy is with an agent – to find out if a private option is available. Private coverage is not always cheaper, however, says Chamberlain.
Whether it’s private coverage or federal, Kunreuther is on a mission to spur owners to get coverage and keep it. “Part of the problem is that ‘high risk’ is defined as an area will flood at least once in 100 years,” he says. “But that means you have a greater than 1-in-4 chance over a 30-year period – the length of your mortgage.”
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