"The service will need to be upgraded to make the property insurable..."

Shop for a better insurance agent/company.
While the service may be inadequate from a modern use perspective, it is not necessarily a safety hazard unless you run extension cords allover the place to reach the few outlets typically available.

200 A is a pretty standard service in residential now.
Put in the largest main panel you can get (usually 40 circuits) with a 200 A main.

If you are not experienced in the ins and outs of residential wiring there are a number of books available.

At the least you will need 2 20 A kitchen counter circuits (withte kitchen spacing rules), a switched outlet in every room, receptacles spaced no further than every 12 feet on the wall of most rooms, dedicated circuits for water heaters, air handlers, air conditioning, heating, bathrooms, electric stoves (dual fuels usually need at least a 30 A)
etc.

You can often due the work in stages, with the first step being a new main panel (the old circuits can be connected to the new main).

You may need to just request bids to see what a complete upgrade is going to cost.

Thanks very much, that's very helpful stuff.i think I will basically end up rewiring the entire home and this gives me a great head start thinking about what is needed. Oh i have to get service into the garage and I think an outdoor service for backyard entertaining. :-)
Please keep the great advice coming!

I would go to Barnes and Noble and pick up a copy of the NEC along with Wiring Simplified and Electrical Wiring Residential by Ray Mullin. This will give you a good understanding of what is required. Then draw up a blue print and submit it to your AHJ for approval before you start the project.

As Brickeyee suggested, find a good pro. You may not need to update everything, Bedrooms may be OK. Most household plugs are two prong. You may just need to bring kitchen, bath, garage, outside and home entertainment places up to standard. (sounds like most of the house)

good luck

FWIW, we are renovating a house from a similar era. Since we're adding on to it, we got a panel upgrade to 200amp (it wasn't original panel but was 100 or 150A.

All the new parts have new wiring on new circuits. The parts of the house that aren't being touched (other than paint and polish) we are leaving the existing wiring, per recommendation of electrician. He will ground outlets (it's BX), but advised that wires themselves won't be a problem and they should be left in the wall.

I live in a similar house. Built in the 20's I believe. Still had the old school panel with an on/off lever which pulled a copper bar to disconnect the hot bus. Someone at some point in time must have been blowing fuses so they decided to throw all 30 amp fuses in there. Now the old knob and tube wiring is pretty sketchy from being over-fused. Insulation has completely cracked away in many spots due to increased heat on the wires.

I'd meticulously inspect what wire you can before you decide to keep using it. I wouldn't even trust the wire in my house to run a light bulb honestly. Plus insulation was blown overtop all the wiring in the attic. K&T was never designed to be covered over. Over-fusing and covering knob and tube wiring with insulation is asking for a fire in my opinion. I'm assuming you have knob and tube since it was built in the 20's anyway.

Long story short, I rewired the entire house except for the ceiling fixtures. What a pain in the butt. Would have been easier to gut the entire house but funds were low so I just old worked everything I could one device at a time. Took all the base boards off and drilled down thru the shoe/plate. There was almost a foot of dead space between plates on the second floor so I had to knock a hole directly below on the first floor as well up by the ceiling.. Ugh... A few hours every night after work for months. No fun... :-)

Not trying to scare you on knob and tube but you have to be aware of the condition of the existing wire.. As long as the sheathing is still good it's no problem. Of course it's still only 14 gauge so is only good for outlets and lights on a 15 amp circuit.

Good luck! You have a lot of work ahead of you but the satisfaction when your done will be worth it. Not to mention it will increase the value of your house. There are alot of good books to be found at Lowe's or Home Depot as well. Step by step with lot's of pictures. Just plan it out really well instead of jumping right in. And of course, make sure you know what you are doing before you start. :-)

Just to point out - I have 20 amp K&T circuits on 12-gauge wire. My house was built in 1947, though, so it's towards the end of when K&T was being installed. I have heard of some rare K&T being done up into the 70's even, which sounds strange, but I guess the method itself is physically superior insofar as reducing short potential.

Granted, the electrician did not inspect every inch of the wire, but he looked in every box on that circuit as well as following it in the basement as far as he could. Oddly enough, that 20-amp circuit goes to the den - where we have next to nothing plugged in! There is an outside outlet piggybacking on it, though, which has been pretty convenient to use for outside lights since it's practically dedicated in our current usage patterns. Even the one remaining "old" bathroom circuit is 15 amps - though it was provided with a ground - also 15a in the kitchen. Makes us wonder what in the world they had planned to plug in to that room in 1947!

"Makes us wonder what in the world they had planned to plug in to that room in 1947!"

Not a whole lot.
Many older houses have one or two receptacles per room.
Even older waffle irons, toasters, etc. did not suck power like the ones we use today.
Blow driers did not exist in the bathroom yet.
A curling iron or an electric razor about did it for bathroom needs.

There is nothing wrong with K&T, and extensions are technically still allowed (but the parts have not been manufactured in many years).
A lot of K&T has been hacked up over the years with additions though, and that is when the problems usually start.
The relative lack of capacity is an issue in a modern house also.
If all you have is a few lights things are often fine.
Add in a TV, stereo, and all the other things we like to have and the large area covered by a single circuit and upgrades are needed.
Some very old wire applied rubber insulation directly to copper wire.
The copper itself causes the insulation to harden up.
Later wire used a solder coat to provide a barrier between the rubber and the insulation (and speed up working the wire also).
Pre-WWII rubber wire has often lost any flexibility, and just trying to work a switch or receptacle makes the insulation fall off the wire.
For these repairs, heat shrink tubing is often your friend.

We are currently in the process of changing our attic space into a master bedroom with a full bath. Our house was built in the 1920's (Tutor Style). We have the old knob and tube wiring running through our joist, which is still functioning. We were going to put insulation between the joist to help with sound. The installer said that he couldn't blow the insulation over knob and tube. He said it was a fire hazard. The contractor said that to re-wire the house it would be an extra $10,000. The wiring is still good and the splices are in good shape. Should we rewire the house or forget about floor insulation? If we don't use the insulation, will the sound be loud from the upstairs? One person suggested soundboard? WE NEED HELP!!!!!

Your installer is correct: DO NOT INSULATE OVER K&T. IT *IS* a fire hazard! You don't *NEED* to rewire IF the wiring is in good condition, preferably without too much amateur "hacking" done over the years. You probably do want to look at the service/panel though, as many of these old houses have now-undersized services and older fuse panels.

One other thing to keep in mind is, K&T is 98% of the time only 2-wire, so if you want 3-prong receptacles, you need to - at LEAST - install GFCI at the first receptacle, and label "no equipment ground" on it & those downstream.

Soundboard might be an option - this goes over your flooring deck and below the carpet, I'm assuming.