Factors That Determine the Cost of Flood Insurance

Factors That Determine the Cost of Flood Insurance

Mortgage lenders require flood insurance if you live in a flood zone, and it can be an affordable investment for homeowners that want to protect their most significant investments. Rates are based on your property’s flood risk and building characteristics. Newer homes often cost less to insure than older ones because they include design features like floor drains that speed up water damage repair. The type of deductible you choose also impacts your rates.

Historical Risk of Flooding

Various factors determine the average cost of flood insurance. One of the most critical factors determining your flood insurance rates is how susceptible your property is to flooding. In the United States, homeowners in high-risk areas (Special Flood Hazard Areas or SFHA) must purchase flood insurance from their mortgage lenders. These policies generally cost more than standard NFIP ones because they cover a higher percentage of the home’s value. The risk of a flood event at a specific property can be determined by reviewing the home’s historical flood history and location. However, this approach is limited by the available data. A better way to assess the potential of a flood is by using high-resolution flood hazard maps and predictive modeling. These tools allow/insurers, banks, and lenders to capture the full range of risks and inform their mortgage/lending conditions.

For example, the NRDC’s Risk Rating 2.0 uses the latest probabilistic flood models to assess the potential of a flood at any address in the US and provides insights into how many properties are at risk. This model is based on the historical record and considers factors like rainfall, previous conditions, and topography. It also considers the effects of climate change and human-induced development. Several other factors are considered to provide the best possible assessment of a property’s flood risk, including its elevation and flood barriers.

Building and Contents Coverage

Most flood insurance policies cover buildings and contents as part of the National Flood Insurance Program, which the federal government backs. A standard NFIP policy covers up to $250,000 of building coverage for single-family homes and up to $100,000 in contents coverage for multi-family residential buildings, such as condominiums. The policy also offers optional ICC (indemnity) coverage for up to $30,000 to bring a home up to community standards after substantial or repetitive damage. NFIP’s policy doesn’t require mortgages or disaster assistance loans to obtain it but is required for those with such financial commitments in high-risk areas. It is also available for renters, non-owner-occupied properties, and businesses not located in flood zones.

While some people think they’re immune to issues that come with flooding, the truth is that everyone is at risk. One inch of water can cause up to $20,000 in damage, and more than 20% of claims happen outside flood zones. While it’s important to know whether or not you live in a flood zone, it’s equally crucial for all business owners to understand the benefits of flood insurance and what factors influence its cost. This can help them protect their operations and even ensure they’re paying only what they should for flood insurance.

Flood Zones

The flood zones that your home is located in determine how high your insurance rates will be. Homes in the highest-risk flood zones will have higher insurance rates than homes in lower-risk zones.

FEMA flood maps show the area’s flooding risks and are used by property owners, insurance agents, and mortgage lenders. Flood zones, floodplain boundaries, and the base flood elevation (BFE) are all shown on these maps. The BFE is the height that flood waters are expected to rise to during a one percent chance of flooding event. Under the National Flood Insurance Program (NFIP), properties in a flood zone are required by law to buy flood insurance. The amount of your policy depends on the type of coverage you choose and how much building and content coverage you want. The home’s flood mitigation features also influence the cost of your policy. Homes built to modern standards may have lower premiums than homes without these features.


The deductibles that flood insurance policies provide are an important part of how much the policy costs. Like with car or homeowners insurance, the higher the deductible you choose, the lower your premium will be. However, when a claim is made, you will be responsible for a larger share of the damage to your property. The amount of deductible you select will affect the building and contents coverage under your flood insurance policy. Building deductibles are based on the value of your home, while contents deductibles are based on the value of personal items inside the dwelling. You can choose between two low levels of deductibles when you purchase a standard NFIP policy for your home: A $2,000 building deductible and a $1,500 contents deductible.

Many people who live in moderate- to low-risk areas choose the default minimum deductible option even though it has significantly higher premiums than other options. This result is consistent with the idea that people who have experienced a recent flood event assign a lower probability to future flood events and therefore opt for the lower deductible option. 

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