Hi all,
I installed in insert last year and although I have a full masonry chimney in fairly good shape, I installed an insulated liner for a variety of reasons:
First, according to the NFPA, a liner is not required ONLY if the existing chimney meets all current NFPA codes. According to my research, very few chimneys meet these requirements (even in brand new houses!). For resale value of the house, I want to be able to honestly state that the insert is installed according to code. Not all local codes follow and/or enforce NFPA, but most do.
Second, as has already been stated, it drafts better and requires less cleaning, and insulating enhances these characteristics. In addition to less cleaning, when I do sweep the liner, the sweepings fall neatly into the insert. If you don't use a liner, the sweepings fall all over the top of the insert, beside it, behind it, etc.
Third, carbon monoxide risk. By having a sealed (or nearly sealed) liner all the way up the chimney, the chance of CO entry into the house is minimized. If you don't use a liner, you will have to install a "block off plate" through which a stub of stove pipe will pass. Getting the block off plate installed and sealed well enough to be sure that it drafts properly and that smoke and CO won't leak into the house can be challenging.
Last but not least, piece of mind. If I remember correctly, the whole job cost me about $3K. The liner and insulation kit were about $600 of that cost. It was well worth it to sleep well at night knowing that the risk of of chimney fire was dramatically reduced and that if there were a fire, it would be safely contained.
I didn't know this until I got well into the installation, but I am pretty sure I would not have succeeded at trying to install a functional block off plate in my particular fireplace (old heatalator). I did install one for extra insulation value, but there is no way that it is sealed well enough that it would have been safe on it's own.
Hope this all helps.
Adam