Hi Nick.
I do remember this behaviour, but to the best of my recollection, I ran across it in only one word processing application, and that one was running on a Commodore 64. The default condition was destructive replacement of the existing character by the new one, and the only means it offered of inserting new text was to insert a 256 space block of 'space' in the document, then type into that space.
I'm curious why you are asking this question at this time—it seems something one would discover missing pretty early in his use of any application that didn't support this.
If I'm correct is inferring that you're just starting to use AppleWorks, then I'd discourage you from continuing. AppleWorks's last update was in 2004, and Apple delared it to be EOL (End of Life) about a year after that. EOL meant that Apple would no longer sell or support AppleWorks, with the implication that it eventually would be unable to run on current system software.
With the introduction of Lion, and its dropping of Rosetta, that implied consequence has come to pass (for Appleworks, and for all other software written for PPC and not updated to run natively on intel processors).
If you're a long-time AppleWorks user, and are aware that continued use depends on the life of the machine you're running it on,that's one thing. If you've come to AppleWorks only recently, I don't see much point in spending the time to learn the intricacies of an application that's been officially unsupported for the more than six years now.
Regards,
Barry