I am sure others have posted this but I will elaborate.
The main problems with K&T is the following in my opinion
1.) Usually only # 14 AWG and so it has a capacity limit.
2.) As you stated it is many times embedded in insulation which defects the designed installation of the product, It needs to be FREE AIR to allow for heat removal.
3.) The rubberish style jacket tends to crack off and expose the conductor which again is a real issue since it is usually in the older insultation that is not flame-retardent.
My largest concern is the capacity to be honest with you and the effects overloading the circuit can have on the OTHER issues given, with the advent of many chances in our lifestyles the owners tend to bring in new things like computers and flour. lights and so on that create harmonics and increases the load value on the neutral which is a shared capacity neutral sometimes with many rooms…it is also usually # 14 AWG…now you have a neutral on a circuit that could be overloaded…and add the fact it can’t radiate heat from the wire because it is also now baried in insulation because the home owners wanted some storage space…yeah we have all seen this.
Now ofcourse we are not speaking of any “grounding” potential as well but that is not nearly as much of MY concern as the previously mentioned issues…a GFCI on the circuit can add protection ( having nothing to do with grounding as you all should know ) but it does not solve the problem of potential overloading.
Usually in a K&T house we see maybe 2 receptacles per room, we suggest they upgrade as it is not able to be expanded…BUT we see extention cords and power strips all around…increasing the load and demand on a conductor that was not designed for it based on it’s layout…which is a huge common neutral in most cases…the poor neutral could have issues…even WORSE if the home is a 120V service…all on the same LINE will compound the issues on the neutral…now in an older 120/240V service…IF the circuits were done right you can reduce the issue a little…BUT all depends on the layout of the panel and hope it was done by someone who KNOWS the effects.
While K&T is accepted because the code is not retroactive…BUT it should always be called out and explained it is not able to handle the demands of our generation or the next generation…so it is a PAY NOW or PAY LATER issue…I prefer to have them PAY NOW…