INSURANCE: 7 Flood Insurance Myths

Much of what you know about federal flood insurance may be flood insurance myth.

Myth #1: Hurricanes, not floods, are the No. 1 natural disaster and cause the biggest economic losses in the United States.

Hurricanes grab the headlines, but because floods happen in virtually every part of the country, they cause more losses than any other type of natural disaster.

What causes floods?

• Rising rivers

• Storms

• Early snowmelts

• Manmade problems from the construction of roads, shopping malls, homes, and industrial complexes

• Hurricanes

Myth #2: Everyone who lives in a flood zone has to buy flood insurance.

Nope. You must buy flood insurance only if you meet all three of these criteria:

• You buy a home in a special flood hazard area where there’s a 1% chance of flooding in any year.

• Your community participates in the National Flood Insurance Program.

• You buy your home using a loan from a federally insured financial institution, or a Fannie Mae- or Freddie Mac-guaranteed loan.

If you don’t meet these three requirements, no one will make you buy flood insurance.

About 5.6 million home and small-business owners live in the more than 21,000 communities that participate in the flood insurance program, according to the Government Accountability Office.

Myth #3: Flood insurance is always expensive.

Flood insurance through the National Flood Insurance Program is sometimes expensive and sometimes cheap, depending on how much your home and its contents are worth.

• It can cost up to $6,000 a year if you buy the highest possible coverage of $250,000 and live in a high-risk area.

• It could cost $472 for $35,000 in damage coverage in a high-risk area.

• It can cost as little as $129 a year for $20,000 of rebuilding coverage and $8,000 in contents in a low-risk area.

Premiums vary a lot based on where you live. If you want to buy $250,000 of building coverage and $100,000 of contents coverage, you’d pay about:

• $6,000 in a high-risk coastal area

• $2,700 in a high-risk inland area

• $400 a year in a low-to-moderate-risk inland area.

Myth #4: Taxpayers are footing the bill for federal flood insurance.

The NFIP doesn’t spend any tax dollars. The government sets the premium rates high enough

to cover flood insurance claims and operating expenses in an average historical loss year. The program can borrow money from the U.S. Treasury when losses are heavy, but has to pay those loans back with interest.

Myth #5: Companies sell flood insurance, so we don't need government to compete.

Private flood insurance isn’t available for homes valued at less than $1 million and only four companies offer flood insurance to home owners with high-value property, according to a Government Accountability Office study. The National Flood Insurance Program is the only program offering low- and middle-income home owners flood insurance. If it disappeared, those home owners wouldn’t have another option.

Myth #6: I don't own a beach house. People who do use flood insurance most.

Many people associate beachfront property with flooding, but more than 98% of the properties insured through the National Flood Insurance Program are inland. Most beach areas are off limits to the National Flood Insurance Program because the Coastal Barrier Resources Act bans federal support of beachfront development.

Myth #7: The flood insurance program subsidizes beachfront home owners.

Five of the top 12 states with the most number of years in which claims exceeded premiums are in the Midwest. Many of the states hardest hit by floods are nowhere near the beach:

• Illinois

• Kansas

• Missouri

• Ohio 

• South Dakota

• West Virginia

In the few coastal areas where the National Flood Insurance Program is allowed, the number of flood insurance policies issued represents only 2% of all NFIP policies.