The market value of my home has declined over the past few years. Can I save money by reducing my homeowners coverage?
No. You should never lower the amount your house is insured for just because housing prices have dropped. That’s because cutting the amount of your insurance could leave you with insufficient coverage in the event of a disaster.
The market value of your home and its insurance value can vary widely because they are based on different assumptions and calculations. The insurance value is based on what it would cost to rebuild the house -- not on what you paid for it. And although housing prices have dropped, rebuilding costs have not. (On the other hand, the sales price takes into account the value of the land, which isn’t factored into the insurance value; the land could still be valuable, even if your home were to burn down .)
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To calculate how much it might cost to rebuild based on your home’s size, building materials and any special features, try the calculator at AccuCoverage.com. For $7.95, you’ll get an immediate estimate of your home’s insurance value from Marshall & Swift/Boeckh, which provides building-cost estimates to the insurance industry. It’s also a good idea to rerun the numbers after you make any major home improvements, and notify your insurer if you need to increase your coverage. You can usually boost your insurance limit by tens of thousands of dollars without making your premiums go through the roof (see Upgrade Your Home Insurance for more information about calculating your insurance needs).
To save money on your homeowners insurance, however, you could increase your deductible. Increasing your deductible from $500 to $1,000 could lower your premium by as much as 25%. And increasing your deductible will discourage you from filing small claims that could jeopardize your insurer’s claims-free discount or get you dropped by your insurer altogether (boost your emergency fund to make sure you have enough money to cover the deductible). See Slash Your Insurance Costs for strategies to help you save money on all kinds of insurance.
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