5 myths about flood insurance

When my basement flooded this spring, I learned the hard way about what my policy did not cover. Turns out, I was lucky. But flood victims like the McCoys weren't. Read on.

By Sharon Epperson

Dora and Larry McCoy bought their Lane, Kan., home five years ago directly from the sellers. They didn't take out a mortgage and didn't think they would need flood insurance. Then, on June 29, after heavy rains pummeled their one-story home, water from a nearby creek overflowed, seeped into the basement and rose almost to the ceiling. The damage was too severe to repair, and the house was demolished. "I went from owning a home to being in debt," Dora says. "They make flood insurance so high, most people around here don't have it."

People make a lot of assumptions about flood insurance, and those misconceptions can be costly. Here are five myths -- and the facts:

Myth: I have homeowner's insurance and don't live in a flood zone, so I don't need it.
Fact: This summer, Kansas, Missouri and Oklahoma residents suffered terrible flooding, and many were miles from the nearest river. "Flooding can happen anywhere. It has happened in every part of this country in the past 12 months," says David Maurstad, of the Federal Emergency Management Agency, which runs the National Flood Insurance Program (NFIP).

Homeowner's insurance policies do not cover flooding. A separate policy is needed and can be purchased from an insurance agent or directly through NFIP, which administers the program. More than 20,300 communities nationwide participate in NFIP. So most, but not all, homeowners qualify for flood insurance. Check the "Community Status Book" at fema.gov to find out whether your area participates. Then, go to floodsmart.gov and click on "What's your flood risk?" to determine your odds and find a local agent.

Myth: Flood insurance is pricey.
Fact: For fairly low-risk areas, lower-cost "preferred-risk" premiums covering the building and personal belongings can start as low as $112 per year. Full coverage, including $250,000 of building and $100,000 of contents coverage, costs $317 per year, or less than $30 per month. The nationwide average for flood insurance coverage is less than $500 annually. That's often less than interest on a federal disaster loan, plus you don't have to repay the money.

Myth: Federal disaster assistance will cover damage.
Fact: Don't count on it. "A community must be declared a federal disaster area before it is eligible for disaster assistance," says Bob Rusbuldt, of the Independent Insurance Agents & Brokers of America. "Federal disaster assistance declarations are awarded in less than 50% of flooding incidents."

Myth: My lender didn't require flood insurance, so I don't need it.
Fact: Lenders should notify borrowers in special flood hazard areas that they're eligible for flood insurance. But floodwaters don't stop at a line on a map. "One-third of flood insurance claims in a given year come from low- to moderate-risk areas," Maurstad says. Even in low-risk areas, ice jams, melting snow and inadequate draining systems can wreak havoc.

Myth: Flood insurance will cover the entire house, including the basement.
Fact: Comprehensive flood coverage should include two policies: one for the structure and one for the contents of the home. Yet, most contents in the basement are not covered, as I discovered when my home was flooded after heavy rains this spring. Basement contents coverage includes the washer and dryer, but it does not include finished walls, carpeting, floors, furniture or personal belongings.

CNBC correspondent Sharon Epperson is the author of "The Big Payoff: 8 Steps Couples Can Take to Make the Most of Their Money -- And Live Richly Ever After"(Collins, $22.95).