1. I have booked hotels directly through the hotel website but I know that sometimes when you book a tour package from a local company they may have better deals. As far as I know, VAT paid only by Israeli citizens - local or tourists alike;
2. I have seen on flyertalk discussion about World MasterCard covering insurance; you may want to search; The insurance on my Avis car was double the price of the rental.
3. I recently rented from Avis in TLV; I drove several times on highway 6 which is the toll road in Israel and cameras take a picture of when you enter the highway and when you leave and charge your license plate accordingly. Avis added a 15 NIS charge for the service of billing my credit card. From TLV north to Afula and back and then south to BeerSheva and back was around US$ 30 or so; pricey but worth it.