How much you INSURE your home for has nothing to do with home much you can SELL your for. Most people make the mistake of thinking that insurance value and selling (or buying) price are the same thing , but they're not. Sometimes , like in a very volatile housing market (either rising or falling) , the two values could be very , very different - and here's the reason why.
Your insurance company is NOT in the home buying business , they are in the home building business. In fact , they're not even in the building business; they're in the REbuilding business , which costs even more. If your home burned down tomorrow , your insurance company would not go looking to buy another house for you to move into. Instead , they would start over - on your existing lot - rebuilding your home that was just destroyed. They would build it back to the home you had , using all of today's building codes , material costs and labor rates - and chances are today's costs are higher than when your home was built the first time.
Unfortunately , while home prices have been falling , costs for building materials have been on the rise. In fact , lumber , steel and concrete have seen prices go UP just as fast as home prices have come DOWN! It's a double whammy for the insurance companies , and it's the real reason you should not lower your home insurance coverage to match your new - lower - home value.
Make sure you have enough insurance to rebuild - not re-buy - your home. If you don't know how much that is , meet with your local , professional agent for a replacement cost analysis. They should have software available to determine the proper amount of insurance for your specific home. A quick rule of thumb for costs (at the time I'm writing this) is approximately $110 per square foot above ground , and $60 per square foot below ground (your basement). Don't forget , you also need to include enough money for debris removal - knocking down your destroyed home and hauling it away.
Although it seems like an easy way to save money , lowering your home insurance amount could be extremely costly if your home is destroyed and you don't have enough insurance to rebuild.