You can now pay flood insurance premiums monthly. Should you?
Key takeaways
- Homeowners can now make monthly flood insurance payments without being charged an extra fee.
- The change is aimed at increasing the number of homes covered by flood policies.
- Policy participation has been declining in recent years even as more people move to flood-prone areas and natural disasters increase.
Hoping to reverse a decline in flood insurance enrollment by making premiums more manageable, the Federal Emergency Management Agency (FEMA) green-lit monthly payments in January after more than five decades of requiring policies to be paid in full each year.
The new monthly option will “reduce barriers to purchasing flood insurance,” FEMA said in a statement. “The flexibility provided through implementation of an installment payment plan will likely result in greater retention of policyholders and incentivize greater participation.”
The change to the FEMA-administered National Flood Insurance Program (NFIP) comes as more homeowners forgo flood insurance amid an increase in extreme weather and flooding disasters. Despite more people moving into flood-prone areas and an increase in the stock of homes, the number of NFIP policies declined from a high of 5.7 million in 2009 to 4.7 million this year.
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Flood insurance premiums are rising
The attempt to make flood insurance premiums more manageable for families on a budget comes as the cost increases. The average annual cost of a flood insurance policy in February was $892, up from $689 in December 2022, according to FEMA data.
Some of the increase is due to the way premiums for individual properties are calculated. FEMA began using a new pricing methodology called Risk Rating 2.0 in 2021. Prices for flood policies now take into account the flood risk of individual properties, as well as the home’s value, proximity to water and previous flooding history.
As a result, about three-quarters of policyholders saw their premiums go up, and about one-quarter saw a reduction because they had lower-value homes in less risky locations, according to FEMA. Premium increases are capped at 18 percent annually, so even the riskiest properties won’t see their exposure fully priced in for several years.
Are you eligible to pay your flood insurance premium monthly?
The change won’t impact mortgage holders who pay their taxes and insurance with monthly payments into an escrow account, FEMA said in an FAQ. They will continue to make their payments to the company that administers their mortgage, known as a mortgage servicer. The servicer uses that escrow account to pay annual insurance premiums on behalf of the homeowner.
“This plan will be available for policyholders who pay their bills directly, not through escrow,” FEMA said.
The change applies both to new customers, who can choose the option when they apply for flood insurance, and existing customers when their annual policy renews. Policyholders who decide to pay monthly are locked in for the duration of their annual policy and can change to paying for a full year only when the policy renews, FEMA said in the FAQ.
Policyholders can pay monthly by setting up an automatic remittance using a credit card or bank account. There’s no extra charge for making monthly payments, FEMA said. There’s also no discount. It’s simply the cost of an annual policy divided into 12 payments.
Should you switch to monthly payments?
Families on a tight budget may benefit from switching to monthly payments, especially since there are no fees for paying in installments, says Thomas Nitzsche of Money Management International.
Not everyone can come up with a big lump sum for an annual payment. We recommend that folks take their budget and split things into monthly buckets to make it manageable.
— Thomas Nitzsche Financial Educator, Money Management International
There’s one option in FEMA’s installment plan that Nitzsche cautioned against: putting the monthly payment on a credit card. He suggested setting up the automatic payment using a bank account or a debit card instead.
“Unless you are sure you can pay off your credit card every month, you could be paying it off for years, with high interest rates,” he says. “It’s a slippery slope when you start putting monthly bills like that on a credit card.”
Flood insurance isn’t included in standard home insurance policies
While home insurance policies cover a lot — typically the structure of your home, the belongings in the home, liability and more — they usually don’t cover natural floods.
In a survey of homeowners conducted last year by Trusted Choice, a group representing the Independent Insurance Agents & Brokers of America members, 56 percent of respondents said they were unaware that flood damage is excluded from standard homeowners policies.
If you have a mortgage and you live in an area designated by FEMA as a high-risk flood zone, you’re required to have flood insurance. If you paid cash for your home or you live in an area that’s not designated as being high risk, a flood policy isn’t mandatory.
That means if your home is damaged by flooding and you don’t have a separate flood policy, you’ll be footing the bill to repair or rebuild the property.
Nearly half of all flood damage to homes occurs outside of flood zones, and many of those homeowners don’t think to buy flood insurance.
— Donald Hornstein Director of the Center on Climate, Energy, Environment and Economics, University of North Carolina at Chapel Hill
Risk of flooding
Flooding is the most frequent and costly weather threat in the U.S., according to the National Oceanic and Atmospheric Administration. Even just one inch of floodwater in a home can do as much as $25,000 in damage, according to FEMA.
In September, flooding from Hurricane Helene resulted in $20 to $30 billion in uninsured flood losses, according to CoreLogic. Much of it was inland, high in the Blue Ridge Mountains — a region that typically doesn’t flood.
People without flood insurance who lose their homes in a disaster can get some help from the federal government, but it’s typically a fraction of what a flood insurance policy would cover. FEMA paid an average of $3,000 per applicant for disaster assistance grants between 2016 and 2022. By comparison, the NFIP paid an average claim of more than $66,000 to people who had flood insurance, FEMA said.
Last year there were 27 natural disasters in the U.S. with losses exceeding $1 billion each, compared with an annual average of nine events (adjusted for inflation) between 1980 and 2024, according to NOAA. About 90 percent of natural disasters involve flooding, according to the Department of Homeland Security.
