Those who live in flood prone areas should know one thing first: Home insurance will not cover damages caused by a flood. For that you'll need flood insurance, which is a special policy backed by the federal government with cooperation from local communities and private insurance companies.

Congress created the National Flood Insurance Program (NFIP) in 1968 to enable homeowners, renters and business owners to purchase insurance. While the policy is backed and administered by the federal government, you can purchase one through regular home insurance companies. If you purchase a home in a moderate- to high-risk flood zone, most lenders require that you have flood insurance before they will give you a mortgage.

To be eligible for flood insurance, you must live in a community that participates in the NFIP. In return, communities must implement floodplain-management regulations that minimize future flood losses. To see if your community participates in NFIP, check its Community Status Book.

Although flood insurance can be relatively inexpensive depending on where you live, most Americans neglect to purchase protection. Yet your home has a 26 percent chance of flooding as opposed to the 9 percent chance of fire during the course of a typical 30-year mortgage, according to the NFIP. Almost 25 percent of all flood insurance claims come from areas with low to moderate flood risk. In 2007, the average flood claim was $24,000 per household, according to NFIP.

As of 2007 there were 20,100 communities that have agreed to stricter zoning and building measures. The Federal Emergency Management Agency (FEMA) estimates that those flood controls reduce losses by nearly $1 billion a year.

NFIP is also in charge of mapping the nation's floodplains, which provides the basis for flood-management programs. NFIP offers an online tool where you can find out the flood risk for your property.

Since the federal government sets flood insurance prices, private insurance companies that sell flood insurance compete on service, not on price. These "Write Your Own" companies make money from service fees allotted by the NFIP. You can find agents selling flood insurance through the NFIP Web site, or call your current home insurer.

Picking a policy

As a homeowner, you can insure your home up for to $250,000 and its contents up to $100,000. If you're a renter, you can cover your belongings for up to $100,000. If you are a business owner, you can insure your building and its contents for up to $500,000.

Under the NFIP, you must select from a menu of coverages for structure and contents, and prices are pre-determined for all choices. Coverage choices also vary depending on your flood-risk zone. For example, under a standard policy, a homeowner in Lake Delton, Wis., in a low to moderate risk zone who wants the highest level of structure and contents coverage can choose the $250,000 structure and $100,000 contents coverage for $1,385 annually; that goes up to $2,562 in high-risk zones and $5,458 in high-risk coastal areas. You can also customize your policy to cover building or contents separately, which is significantly cheaper.

If you live a zone judged low to moderate risk, you qualify for a Preferred Risk Policy (PRP). Your flood insurance premium may be as low as $119 a year, including coverage for your property's contents. This lets you buy less coverage and save money.

A flood policy does not take effect until 30 days after purchase. So, if the weather forecast announces a flood alert for your area and you go to purchase coverage, it's already too late; you will not be insured if you buy a policy a few days before a flood.

Know the government's definition of a flood before you purchase a policy. For example, if water comes into your basement after heavy rains, that wouldn't qualify for a claim. Here are the conditions that need to be met for flood insurance to kick in:

A flood is "a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is the policyholder's property) from:

• Overflow of inland or tidal waters; or
• Unusual and rapid accumulation or runoff of surface waters from any source; or
• Mudflow; or
• Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.

Securing your own flood insurance policy is by far the best strategy for protecting against massive personal financial loss due to flooding. The federal government does not provide assistance unless the President declares a disaster, and even then, help comes in the form of loans that must be repaid with interest.

Insurers and FEMA officials say the national flood program works best when more people participate. This lowers rates, increases the pool of funds from which to draw in the event of a flood and lessens the chance that claim payments will have to taken from taxpayer funds.