In the midst of writing this article, our Congress prepares to vote on the continuation of the National Flood Insurance Plan (NFIP) administered by the Federal Emergency Management Administration (FEMA). Will federal flood insurance be renewed? The answer is almost certainly YES – though the program is far from perfect, it does provide a level of compensation for insured owners who find their homes damaged from flooding.
Flood insurance is not really ‘insurance’; ‘insurance’ is when a large number of situations, ranging from high-risk to low risk, join together and pay into a fund that later pays out when a loss occurs. An example would be when 100,000 homes buy fire insurance, and 2 burn down. The fund or ‘insurance money’ collected as premiums from all participants is then used to pay to repair or rebuild the homes that had the fires. But flood insurance is different, because nearly all of the homes that purchase flood insurance are in a ‘high-risk’ flood zone and are in danger of being damaged by flood. (In general, people with homes that are NOT in the high-risk flood zone do not buy flood insurance.) There are two ways to make this situation work: (1) charge exorbitant premiums for all participants, or (2) charge a more ‘normal’ amount, and let the tax-payers of the nation subsidize the program.
Every time someone buys federal flood insurance, their purchase is subsidized by taxpayers. The amount of the subsidy varies by flood risk and area, but in some cases the home owner pays less than 10% of the true cost of the flood protection.
Investor-owned income property does not receive this same ‘favorable’ rating. While rates vary, it is normal for an investor-owned rental property to cost more than double the annual premium charged to a home classified as owner occupied. In one case that we examined, a home that would pay $1,674 per year for a $250,000 flood insurance policy (the highest amount that is sold), would pay $3,637 as an investment rental. That is a 217% increase. Many people say, this is as it should be; the program subsidy should be less for investors who are out to make money from their property!
Some folks might think, “I will just say this property is my primary residence.” Be aware that FEMA takes especially serious concern of this. You must provide proof of primary residence, including a copy of your last federal income tax return. Investors, property managers, and real estate agents risk being charged with insurance fraud if they are complicit in any way with a flood insurance application that asserts a property is a primary residence, when that is not true.
While federal flood insurance can be sold by any licensed insurance agent, it is a complicated government program with a lot of rules and special provisions. The cost should be the same, no matter where you buy it. But since some agents do not do this often, premium quotes can differ between agents. Make sure your agent knows what they’re doing. The government does not honor quoting errors, so when FEMA issues the policy, only the correct premium is used.
In conclusion, when considering a rental property that is in a high-risk flood zone, know the cost for flood insurance as a rental, before you buy.
* * * * * * CLARK SANCHEZ has been an Arizona insurance agent for over 38 years and has been a Vendor-Affiliate with AZREIA for over 13 years. You can contact Clark if you have any insurance related questions at firstname.lastname@example.org or (602) 803-2179.