Knob-and-tube was the standard residential wiring method roughly from the 1880s into the 1940s, which covers an enormous share of the housing stock between Revere and Cambridge. You can recognize it by ceramic knobs holding single conductors away from framing and ceramic tubes protecting them where they pass through joists.
It was well engineered for its era. The conductors are separated and air-cooled, which is genuinely effective at dissipating heat. The problems are the ones a century of use creates around it.
First, the insulation. The original rubber and cloth becomes brittle and crumbles, especially near heat sources and inside boxes where connections were made. Second, there is no ground. Everything is two-wire, so nothing on that circuit has an equipment ground, and modern three-prong appliances have nowhere to send a fault. Third, and most damaging, insulation gets blown into walls and attics around it. Knob-and-tube depends on open air to shed heat, and burying it in loose-fill defeats the one thing it needed. Fourth, decades of well-meaning modifications: splices to newer cable made without boxes, extensions run to add outlets, circuits extended far beyond what was intended.
Insurers ask about it because of that combination, not because the original installation was bad. Some carriers will decline coverage outright; others require an electrician's letter documenting condition or partial replacement. That's worth confirming before you buy a house, not after.
The practical answer is rarely all-or-nothing. When we find knob-and-tube, we map what's still live, which is often less than owners expect, and prioritize: anything buried in insulation, anything in a kitchen, bath, or basement, anything feeding a modern appliance load, and anything with a visible splice or brittle insulation goes first. Bedrooms and lighting circuits in good condition can often be scheduled for a later phase.
The cheapest time to do any of this is when walls are already open. If you're renovating a floor, that's the moment to pull the new circuits, even if you weren't planning to. Fishing the same wire into a finished, plastered wall costs considerably more, and the patching bill is real.
If you don't know what's in your walls, a written safety inspection will tell you. Knowing is much cheaper than finding out during a project.