A reasonable person would update both the probability that he is in a simulation and the probability that he is insane to be a good deal higher, at the expense of the hypothesis "I am sane and not in a simulation".
Yes I agree. But if he already thinks there is a good chance he is insane, then it seems to me most of the extra probability will go to that hypothesis alone.
For example, if you think there is a 1 in 100 chance that you are in a simulation and a 1 in 10 chance that you are insane; and then you get a visit from Mr. Simulator, then arguably you should conclude that there is a very high probability you are insane, perhaps 90%. Anyway, the main point is that these two issues -- insanity and simulation -- can be conceptually separated to a large extent.
Well, it depends what you mean by "most of the extra probability" - a change from 50% to 60% probability represents a smaller change in perceived amount of evidence than from 1% to 5%. I think meeting one of the dark lords of the matrix should probably weigh more as evidence for being in a simulation than for being insane, or at worst it should be 50/50 for each hypothesis.
Certainly the concepts can be conceptually separated (unless you put more meaning into that than I'm seeing), although I object to calling the one question more fundamental than the other.
If it's worth saying, but not worth its own post (even in Discussion), then it goes here.