As far as I know, this feature is not used by anybody. I'm not sure, but I think it probably harkens back to pre-PC, terminal days. I suppose there may be some niche uses, involving forms, but I have personally not encountered them--and I have been using Word for Windows since 1989.
This one gets people all the time, and if they don't have a rudimentary model of how Word works, it completely flummoxes them. It most recently happened to my 12-year old son, who is usually pretty sharp with software features. As soon as he ran upstairs, cursing about Word deleting his characters, I recognized the problem.
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I just noticed, in Word 2007, they have finally done so. Overtype mode has an option setting, and it is OFF by default. It's about time!
That is why the insert key has been physically removed on all of my windows keyboards. I also have removed the caps lock key. I consider them both to be nuisance keys.
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