This paper investigated the impact of the changes of thermal conductivity of an expanded polystyrene insulation layer embedded in a typical residential building on the cooling effect at different temperatures and moisture contents. The simulation was performed using expanded polystyrene (EPS) in the extremely hot conditions of Al-Ain (United Arab Emirates, UAE) at different levels of density, denoted as low density LD (12 kg/m3), high density HD (20 kg/m3), ultra-high density UHD (30 kg/m3), and super-high density SHD (35 kg/m3), and three moisture content levels (10%, 20%, and 30%), compared to dry LD insulation material. The thermal performance of the building incorporating polystyrene with variable thermal conductivity (λ-value) was compared to one with a constant thermal conductivity by assessing the additional cooling demand and capacity due to the λ-relationship with time, using e-quest as a building energy analysis tool. The results showed that, when the λ-value was modeled as a function of operating temperature, its effect on the temperature profile during daytime was significant compared with the use of a constant λ-value. The monthly energy consumption for cooling required by the building was found to be higher in the case of variable thermal conductivity for the LD sample. The yearly average change in space cooling demand and cooling capacity when employing polystyrenes with constant and variable thermal conductivity increased with the increase of the moisture content. Indeed, the highest changes in cooling demand and capacity were 6.5% and 8.8% with 30% moisture content polystyrene.