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US property owners warned not to cut insurance just because home value has dropped

Because it costs more to rebuild than it does to start from scratch, the market value of a house is not a reliable indicator of the amount of insurance you need, industry experts are warning.

'As property values continue to fluctuate consumers might be tempted to lower their policy limits,' explained Elaine Baisden, vice president of national property for Travelers companies Inc, a leading provider of home insurance.

'There has been a lot of noise lately around market values, but market value and the cost to rebuild are two totally different things. So lowering policy limits could leave you under-insured,' she added.

And according to Marshall & Swift, building cost data analysts, it can cost as much as 30% more to re-build a home as opposed to building a new one. Reconstruction costs are generally greater, a spokesman said, because the process usually involves the demolition and removal of damaged property. On-site mobility is also often limited by the need to work around existing landscaping, power lines and other buildings so there are no economies of scale like there are when building row upon row of houses.

Baisden also points out that the value of a property is also is affected by the cost of the land on which it sits and that is something you should factor in when considering how much coverage to carry. 'Typically, the building lot accounts for 25% of a home's value. You shouldn't use the property's assessed value to determine how much coverage you need,' she said.

There are ways of reducing insurance premiums that will not leave property owners out of pocket if the property has to be re-built, experts point out. Avoid nuisance claims is one possibility as the more claims you file, the more you are going to be charged, even if the claims are legitimate.

Another is to raise the deductible on your policy. A deductible is the amount you pay toward a loss before your coverage kicks in. The higher the deductible, the lower the premium.

According to the Insurance Information Institute, an industry-supported non-profit communications organization, bumping the deductible from $250 to $500 could cut your costs 12%. You could save as much as 25% by jumping to a $1,000 deductible, and up to 30% by going to $2,500.