Frugal Confessions — Live a VIP Life on an Average Paycheck

Flood Insurance Crash Course Part 3: How Would We Have Fared Financially?

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I had two reasons for writing this flood insurance series (here is Part I, and here is Part II) in the aftermath of the Houston Memorial Day floods. The first was to determine whether or not our own flood insurance policy would have been adequate — since we were just blocks from having to use it — and the second was to prepare you for the real financial implications of a disaster (the kind that can get lost in policies and regulations).

So let’s bring this series home with an assessment of our own coverage + a bit more info for how to get your own flood policy (knocking on wood — times 10 plus I’ll pick up a heads-up penny in hopes that you never have to use it).

Details of Our Personal Flood Insurance Policy

You can bet I took a triple look at our policy after digging into the aftermath of all of this. I mean, how would we have fared had our home been just three stop signs closer to our bayou?

Here’s the details of our policy:

  • Policy Cost: Our policy costs $281 annually ($259 + a $22 Federal Policy Fee).
  • Policy Coverage: The coverage for our building is up to $75,000, and coverage for our contents is up to $30,000.
  • Policy Type: It’s a Preferred Risk Policy, meaning we are in a moderate-to-low-risk area.
  • Cost of Maximum Coverage for Us: The maximum that we can get is $250,000 for buildings, and $100,000 for contents.

flood insurance_frugal confessions

How We Would Have Fared

Before we go into an assessment, I wanted to address insurance in general.

I was contacted by an insurance agent (she wishes to remain anonymous) who brought up a great point. “Insurance is NEVER intended to take care of a policyholder 100%. The homeowner will always incur costs. Insurance is a risk SHARING tool. An insurance company agrees to SHARE YOUR RISK. But that doesn’t absolve the homeowner’s / policyholders from understanding their coverage, and having money in savings to cover their deductibles and their share of the loss. It gets a heavy burden when everyone blames the insurance company because they weren’t prepared.”

Having said that, here’s an assessment I’ve done based on research and people’s experiences (refer back to Part II in this series for a discussion of what each of these items below means):

  • The 50% Rule Wouldn’t Apply to Us: We live in a moderate-to-low-risk area, so from what I’ve read, the 50% rule where if your home is damaged beyond 50% of its appraised value it has to have substantial work done (like elevation), would not have applied to us. This is a good thing, as the cost of doing so would likely have been more than our maximum coverage amount on the building.
  • The 80% Rule Would’ve Dinged Us: Our home Replacement Cost Value was determined at $259,500, and we only have it insured to $75,000. Interestingly, our home cost us $165,000, so I’d have to do some research into why the replacement cost is so high. Hmmm…
  • We Would Still Owe to Our Mortgage Company If We Wanted Out: Let’s say the damage was so great, or we were so emotionally devastated, that we wanted to just wash our hands of it all and move. Since we still owe around $120,000 on our mortgage, and our maximum insurance claim we could receive on our building is $75,000, signing over that check means we would still owe roughly $45,000. Best-case scenario for us at that point — if we don’t want to drain our savings and walk away underwater, literally, after six years of paying on a mortgage — would be to sell our home to someone in the hopes of getting an offer high enough to pay the additional $45,000 off of the mortgage plus recouping the roughly $45,000 in equity we have paid into our home. As to whether or not we could find a buyer to do this with a flooded home…I’m really not sure.

Decision Time

So, after all of this info and experience, I’ve got two questions for you:

  • If you already have a flood insurance policy, do you feel good about the amount you have?
  • And if you don’t have one, do you think it’s time that you purchase one?

You should know that everyone lives in a flood zone – it’s just a question of whether you live in a low, moderate, or high risk one.

Of course, whether or not you choose to get coverage (a choice you have as long as you’re not in a floodplain) is completely up to you. If you wish to do so, you can get an estimate on coverage costs for your personal home by filling out the flood risk profile box on the right hand side of this page (our estimate came out as moderate-to-low risk, with estimated coverage costs of $44-$266 for content only and $137-$452 for building and contents — completely accurate with what we are paying, though the range is a bit big).

To give you an idea of how expensive it could get if you were in a floodplain, Pat’s mandatory coverage costs her $1,757 each year. Another friend of mine who is in a floodplain pays around $900/year.

Remember, there is a 30-day waiting period for most policies to go into effect, so if you wait to purchase a policy until you hear on the news about a tropical development, it might be too late.

As for us, if there’s one thing I’ve learned, it’s that flood damage is incredibly expensive to fix. Tweet this! This project, along with driving up and down the streets of debris-filled streets and flooded homes, has been eye-opening. We will likely be increasing our policy limits at renewal time. Perhaps not up to the $250,000 limit, but at least enough so that we are covering 80% of the replacement cost of our home.

And dealing with financial catastrophe while in the muck of emotional upheaval is something I’d rather not have to do.

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