Malky,
You talking about the insulation on the pickup coils, or the ignition coils, or both???
Well, before we go hanging a bunch of parts, possibly unnecessarily, let's do some lookin around.
Inspect the cap and be sure it's in good condition, look at the under the coil graphite bushing, "rotor button" as most call it. It should be protruding from the bottom of the cap boss approx 1/8 of an inch. The rotor itself on these HEI's can be kind of finicky too, make sure there are no burn through marks on the rotor and make sure the firing tip end has not been excessively ground back(air gap).
Those are pretty much the basics as far as visual inspection. I would rather see you find a good 12v source at the fuse block to run a 10-12 ga. stranded lead wire from, to the ignition switch instead of the relay. I know it works, but it is a potential problem spot. Just fold the factory resistance wire back and tape it up for possible future use.
The HEI is very voltage sensitive in that it has to have enough oomph to operate correctly. Alot of guys have forgot this and just connected their factory resistance wire to the bottom of the cap terminal only to find the car runs like garbage afterwards. Oh sure the thing will still run...sort of... but it will not run like it's supposed to. You need a minimum of 12v to make it work the most for you and anything more makes it turn rpm higher and higher. Don't go over 18.5v for an extended period or you'll toast it in short order.
Most important is to make sure the basic tune up is in order and work from there. I've seen these same problems be anything from a bad rotor to a bum set of plugs, to a bad new electronic part (new don't always mean good). Since you are where you are and I know how $$$ things get when experimenting there, lets try and test before we go hanging too many parts on it unnecessarily.
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