Reducing your homeowners insurance because the value of your home has declined seems like a no-brainer, right?  But there's a very compelling reason why this is one way you don't want to save money.

The idea of cutting your homeowners insurance is a refrain I've heard again and again, particularly in some of the bubble states. Home values have fallen so far and so fast that when you get that insurance renewal, it's easy to feel that you're grossly over-insured.

Here's the problem: You need to insure your home for the replacement value, not the market value. If you suffer a catastrophic loss, the cost to rebuild would be far higher than what you could sell your home for right now.

The October issue of Money Adviser, a publication of Consumer Reports, reports that some two-thirds of homeowners are significantly underinsured. The average home is now worth a third less than it was five years ago at the same time that the cost of reconstruction is up. So the typical person who thinks they're over-insured is actually under-insured.

Here's what I recommend:

• Talk with agent or insurance company. See if you're adequately insured. Insurers used to rebuild even if you didn't have enough stated coverage, but that's no longer the case. It's up to you to stay on top of this.
• At the same time, raise the deductible on your policy. Typically, people will raise their deductible by up to 30%. Some mortgage lenders may have a cap on how high you can set your deductible. Check with yours about any limitations.

As you bump up your deductible and the level of coverage, you could have an even lower premium than you do now. Now, I should say that if you do have a claim, there will be more initial dollars coming out of your pocket. But Money Adviser says that only 6% of people make a claim during a five year period of having a policy, so the likelihood that you would is tiny.