Vrakas CPAs, Here Are Your Articles for Wednesday, October 25, 2017
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The Complex World of Flood Insurance

 

The National Flood Insurance Program was created by Congress in 1968 to help property owners financially protect themselves. The program offers flood insurance to homeowners, renters and business owners if their community participates in it, and remains the main source of flood insurance in the United States.

The NFIP is administered by FEMA, which works closely with more than 80 private insurance companies. Although the government administers the program, consumers purchase the insurance through private property and casualty insurance agents. Rates are set nationally and don't differ from company to company or agent to agent, so there's no need to price shop. However, insurers do have to look at the details of your situation when writing a policy. Rates depend on many factors, including  — date and type of construction of your home or business, along with your building's level of risk.

Building coverage includes:

  • The insured building and its foundation.
  • The electrical and plumbing systems.
  • Central air-conditioning equipment, furnaces and water heaters.
  • Refrigerators, cooking stoves and such built-in appliances as dishwashers.
  • Permanently installed carpeting over unfinished flooring.

Contents coverage includes:

  • Clothing, furniture and electronic equipment.
  • Curtains.
  • Portable and window air conditioners.
  • Portable microwaves and dishwashers.
  • Carpeting that is not already included in property coverage.
  • Clothing washers and dryers.

The two most common reimbursement methods for flood claims are replacement cost value (RCV) and actual cash value (ACV). The RCV is the cost to replace damaged property and is reimbursable to owners of a single-family primary residence insured to within 80 percent of the building's replacement cost. All other buildings and personal property contents are valued at the ACV. The ACV is the RCV at the time of loss minus physical depreciation. Personal property is always valued using the ACV.

Homes and buildings in high-risk flood areas with mortgages from federally regulated or insured lenders are required to have flood insurance. In high-risk areas, there is at least a one-in-four chance of flooding in a 30-year mortgage time frame.

Homes and businesses located in moderate-to-low-risk areas that have mortgages from federally regulated or insured lenders are typically not required to have flood insurance. Even though flood insurance is not federally required, anyone can be financially vulnerable to floods. People outside mapped high-risk flood areas file more than 20 percent of all NFIP flood insurance claims and receive one-third of federal disaster assistance for flooding. When it's available, disaster assistance (separate from insurance) is typically a loan you must repay with interest.

More than 22,000 communities have implemented floodplain management measures and participate in the NFIP. Just a few inches of water from a flood can cause tens of thousands of dollars in damage. From 2010 to 2014, the average residential flood claim amounted to more than $39,000. The average flood insurance policy premium is about $900 per year.

Costs vary depending on how much insurance is purchased, what it covers and the property's flood risk. Typically, there's a 30-day waiting period from date of purchase before your policy goes into effect. So don't wait for a bad forecast before running out to buy flood insurance.

 

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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