Is it safe to put insulation next to knob & tube wiring?
The answer changes depending on location.

Because of a complete lack of actual fire incidents, four Western USA States: CA, OR, WA and ID petitioned for an exception to NEC 394.12 and permit insulating over Knob &amp; Tube Wiring.  In some places you must first file a Knob-and-Tube Wiring Safety Report, and everywhere else it's a good idea.

It is a complete myth that Knob &amp; Tube must be air cooled. Instead measure the gauge of the wire and put in an appropriate AFCI breaker for the gauge, and you're done. 100 year old copper is just as good as modern copper, in regards to household use.  You should remove from the K&amp;T any high load devices.  What's left, especially in the era of CFL's and LED's, won't draw enough current to cause a problem.

The insulation of the era was not all that good, and perhaps for that reason K&amp;T does not depend on it.  Ceramic tubes will outlast civilizations, and hold the wires apart even if the insulation is damaged.

You can even add an extra margin of safety by underrating the K&amp;T (the opposite of depending on air cooling).  For example if you find 12 gauge wire, put a 15 amp AFCI in place, and you're more than done.  For 14 gauge wire, a 10 amp breaker might do nicely, even if they look at you funny at Home Depot.  Home Depot probably won't have the right breaker, but you can brave DIY scorn at Grainger, or just order online.

See


http://www.pct.edu/wtc/docs/articles/KnobTube_Report_WTC.pdf
https://diy.stackexchange.com/a/20279/5960
http://homeenergypros.lbl.gov/forum/topics/knob-and-tube?page=1&amp;commentId=6069565%3AComment%3A79069&amp;x=1#6069565Comment79069


You should, however, replace any fuses.  Those are dangerous, even with Type S fuse bases.