Why Should I Maintain the Same Home Insurance Coverage When My Home Value Is Falling?

Home prices have taken a terrible beating in this down market. In some places the home prices are down 30% of more. Then why does my insurance company insists on making me have the same coverage? Should I now be saving on my insurance premium by reducing my coverage amount by 30% to match my lower house value or so.
The answer unfortunately is NO! Purchase price of your home includes both land and structure. In general you are insuring your home structure and contents. You do not buy insurance to protect the land.
Even in recession the cost to rebuild the home exactly as it is keeps increasing each year. Recession has not reduced the cost of rebuilding the home significantly. Most Low Cost Home Decor price differential is due to the assessment of land value which is not insured. So when the real estate market falls you can not automatically reduce home coverage.
Reducing the coverage by 30% does not save you proportional amount in premiums. When I got two quotes for my house from the same agent a $25,000 difference in coverage amount reduced the annual premium by about twenty bucks. Absolutely not worth the risk.
In fact I want you to consider the opposite.
Normal rule of thumb is to purchase coverage for 80% of the replacement cost. If you do not have sufficient coverage, insurance company may invoke co-insurance clause when you have a damage. You are assumed to be self insured for the difference between the insurance company estimate to rebuild and the coverage you bought.
While this works well in most cases, the coverage amount is the maximum you will be paid in case of total loss. If your mortgage amount is higher than the coverage you will be liable for the rest. Spend a little more and make sure the policy covers the total mortgage amount.
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