Private Flood Insurance vs. FEMA: Which Is Right for You?

If you live in an area prone to flooding, it’s a good idea to carry flood insurance since traditional homeowners insurance policies don’t cover this hazard. After all, just 1 inch of water can cause about $25,000 of damage, according to the Federal Emergency Management Agency (FEMA). Depending on your mortgage, your lender may require you to have flood insurance.

Though FEMA’s National Flood Insurance Program (NFIP) underwrites most flood insurance policies in the U.S., it’s becoming increasingly common for private insurers to offer this type of coverage. Learn more about these two flood insurance options and how to decide which is right for you.

Private flood insurance at a glance

The majority of flood insurance policies are from the NFIP, while private flood insurers only make up about 32% of policies between 77 private insurers.1

To meet the flood insurance requirement many lenders impose, a private flood insurance policy must offer at least as much coverage as an NFIP policy would. Many private policies actually offer higher coverage limits, as well as some optional coverages, which provides more flexibility for homeowners.2

FEMA flood insurance at a glance

The federal government created the NFIP as a part of FEMA in 1968 with the goal of reducing flood damage and protecting property owners. Flood insurance through the NFIP is available to anyone who lives in one of the more than 23,000 participating communities around the U.S.4

NFIP flood insurance offers coverage for homeowners, renters, and business owners in amounts of up to $250,000 for homeowners, $100,000 for personal belongings, and $500,000 for businesses. Rather than being underwritten directly by FEMA, many participating private flood insurers underwrite these policies.5

The NFIP sets premiums nationally, which means you’ll see less difference based on location and insurance company than with private insurance. Instead, your rates depend on your risk rating and property-specific factors, including the date and type of construction. The average annual flood insurance premium is about $700, according to FEMA.

Private flood insurance vs. FEMA

Both private flood insurance and the NFIP through FEMA can be good options when buying flood insurance. Which one you should buy depends on a few key factors, including where you live and what you’re looking for in a policy.

First, to purchase flood insurance through the NFIP, you must live in one of the 23,000 participating communities. The good news is that your community likely participates if you live in a high-risk flood area. If you aren’t sure, you can visit FEMA’s community status database.

Private flood insurance may be the better option if you don’t live in a FEMA-participating community, need higher coverage limits, or want a more customizable plan.

A key consideration when choosing between private flood insurance and NFIP coverage is that private flood insurers have more discretion over the policies they offer. A private insurer could decline to write you a policy or elect not to renew your policy later on — the same can’t be said about NFIP insurance.

It’s also important to compare each policy by premium, pricing structure, claims processing and payouts, and more. You want to feel confident that if you have to file a claim, your insurance company will pay it out in a timely manner. Make sure to shop around for quotes to ensure you’re getting the best policy at the right price.

Assuming you’re eligible for both private flood insurance and an NFIP policy, you can choose which type of policy works best for you. Here are a few of the factors you’ll want to consider:

Evaluating your coverage needs

As with any type of insurance policy, evaluating your coverage needs is important before purchasing your flood insurance policy. Here are some things to do when choosing your coverage:

• Assess your flood risk. It’s important to understand your home’s risk of flooding. FEMA uses its Risk Rating 2.0 system to evaluate your flood zone and risk level. If you live in a high-risk flood zone, sign up for flood insurance sooner rather than later — your lender will probably require it.

• Understand your policy limits. Coverage limits are one of the most important characteristics of any insurance policy. It’s critical to choose a policy that offers enough coverage. Private insurers can typically offer higher limits than the NFIP.

• Compare costs. While NFIP costs are set nationally, private policy premiums may vary depending on where you live. In all cases, your home’s characteristics and risk level will affect your premiums. Make sure to shop around and get quotes from several insurers before choosing one.

• Understand your risk tolerance. Insurance is all about risk management. Knowing your risk tolerance can help you choose the right type of flood insurance policy, coverage limits, and more.

Private flood insurance vs. FEMA FAQs