Why Reducing Property Insurance Can Be a Bad Idea

America’s challenging economy is perhaps best understood through the severe state of the nation’s real estate market. Home values everywhere have fallen and continue to fall across the country, and the boom of the mid-2000’s has definitely come to a screeching halt. Because home values have fallen, many home owners are thinking about cutting their home insurance in order to reflect the new value of their asset. While it may seem tempting to reduce your home insurance and save some money on the lower coverage premiums, it’s a very risky move indeed and few experts would advise doing such a thing.

Many people think it’s a savvy move to lower their home insurance coverage if the value of their home has fallen. This is a big mistake, because the market value of a home is not linked to the cost estimates of repairing it from, say, a total loss. Let’s say you’re away on vacation and your home burns to the ground. Your home insurance will pay for how much it will cost to repair it. If you reduce the amount of your home insurance you will get less money for the necessary repairs – and while your home may be worth less now, the price of materials and labor and other construction components have not. In other words, you may get $150,000 from your home insurance provider, but the costs to rebuild will be $200,000. Now you have not only a burned-out shell of a home, but an extra $50,000 in debt. When it comes to the proper amount of home insurance, you need to be thinking in terms of repair costs, not market value. They’re two completely different things.

To lower your home insurance rates without sacrificing needed coverage, think about raising your deductible and making higher monthly payments. You could also start looking for a better rate, and letting your current provider know it. Seeking to negotiate lower home insurance rates is always a good idea.