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Published: Oct 01, 2021 7 min read

Federal flood insurance just got more expensive for millions of Americans, after the government changed the way it prices policies. But there's good news, too: Rates will actually drop for some homeowners, and current policyholders will get a break on how soon they may have to pay higher premiums.

In effect as of Oct. 1 for new policies, the change in the National Flood Insurance Program withstood a last-ditch storm of opposition from a bipartisan group of federal legislators irate at the rate hikes, along with some trade groups who said the new program wasn't yet ready for launch.

FEMA stood firm. The agency acknowledges that more than three-quarters of the 5 million or so homeowners with policies under the National Flood Insurance Program are likely to pay more under Risk Rating 2.0, which is now in effect for new policyholders and kicks in on April 1 for those who currently have coverage. NFIP policies cost an average of about $1,800 a year, and the rate increases could top $240 a year for some homeowners.

But FEMA and other experts say the new system will be more fair and equitable. As the chart in the section below shows, the agency says most homeowners will face only modest hikes -- of no more than $10 a month. And more than one in five policyholders -- many of them in less-valuable homes -- will actually pay less for coverage.

A lot less, in fact, since premiums for these homeowners will drop by an average of $86 per month. Just 4% of policies will rise by $20 or more per month, although the agency did not provide an average increase for that group.

Here’s a rundown of who will pay more (and less) for flood insurance under the new rules, and what you can do now to get the best deal of flood insurance.

Winners and losers from the changes

The update, which FEMA calls Risk Rating 2.0, is the most sweeping change to the NFIP since the program was launched in 1968 to protect property against flooding, which regular homeowners insurance does not do.

In recent years, private insurers have begun to compete with the NFIP by employing new weather data and sophisticated flood modeling to better predict the likelihood of any one property flooding. The new FEMA scheme will employ some of those advances to reduce reliance on FEMA’s historical -- and sometimes out-of-date -- neighborhood flood maps to determine premiums.

Among other changes, the new risk ratings will consider the home’s elevation and proximity to large bodies of water. As a result, rates could drop for, say, a hilltop home within a flood-prone neighborhood, which at present could have a comparable premium to a similar property that’s down the hill and beside the river.

And where rates now tend to be consistent for all residences at a single address, those who live on the upper floors will now get credit for the lower likelihood that their property will flood, says Lindsey Erickson, CEO of National Flood Services, a company that trains and supports insurance agents in selling flood policies.

Rates will also more heavily reflect a property’s replacement value than at present. That makes the owners of beachfront mansions among the likely losers from the new ratings programs -- because of both a bigger emphasis on a home’s location and a bigger emphasis on the cost of replacing it. So, too, will be those with any other home, even a modest one, that’s in a risky location -- like the neighbors, in the example above, who live by the river below that hilltop home.

Source: FEMA

What current policyholders should do

If you currently carry flood insurance, you can relax, at least for a time, since the impact of Risk Rating 2.0 will not fully kick in for you until April 1 2022. Renewals after that date will be under the new ratings criteria -- but with a caveat that helps those whose rates will rise. Under the program, your premium can't rise by more than 18% per year. That means that if your new “2.0” premium represents a bigger hike than that proportion, you’ll be shielded from the remainder until at least next year.

So if, for example, your rate was designated to increase by 25%, you’d pay 18% of it in your first renewal, and then the remaining 7% in your second -- plus any new increases due to other factors in that year. Not only that, but your hikes are also limited to that percentage in perpetuity, regardless of the cause of the increase.

While the likelihood of your rate rising is highly local, down to your specific property, FEMA has created summaries by state of the number of properties that will see rates rise and fall, and by how much.

What new flood-insurance shoppers should do

Prospective new flood-insurance customers needn’t -- shouldn’t -- let the NFIP changes stop them from considering a policy. Coverage can offer worthwhile and cost-effective protection, even if you aren’t located in a flood zone.

The reasons to get protection include the limitations of federal disaster funds to help with floods. The assistance may not be awarded for flooding in your area, and even if it is, the funds fall well short of homeowners’ losses.

Also, keep in mind that, where the risk of flooding is low, so are the premiums. Adding a flood policy in such an area may be more affordable than you think. As noted, most of the hikes in rates under Risk Rating 2.0 will be modest -- no more than $100 or so a year.

A homeowners insurance agent can help you price an NFIP policy. And Erickson advises also asking your agent about private insurance policies, since these are increasingly competitive in many states, and may offer a valuable alternative for properties that will see increases in their NFIP premiums under the new ratings scheme.

“We’re seeing some pretty cool stuff coming out of the private market, and we’re pretty excited about it. If these policies help insure more people against flooding, that’s the goal, after all.”

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