Most recessed lights require that insulation be 3" away from the housing. This still allows for insulation in other areas of the ceiling, so double check with your contractor to make sure that you need to replace your existing fixtures.

If you do need to replace them what you will need are called IC housings. IC means that it can come into direct contact with insulation. Most halogen IC rated housings are large boxes, and in your case, would require ripping out and then replacing your ceiling. If you are already planning on replacing your ceiling then this may be a good option.

If you don't plan on replacing your ceiling I recommend LED IC rated housings. LED IC housings come in a "remodel" type. A remodel type is exactly what the name suggests, and is used in a remodel application because they only require a small hole to be cut into the ceiling. They may be able to fit into the holes of your existing fixtures. See an example of an LED IC remodel fixture at the following link. This is from the manufacturer WAC - http://www.waclighting.com/product/2213

Is this the final configuration of your furniture?

Thanks for the suggestions on the type of lights- we don't plan on replacing or ceiling but will plan on having the painter paint our entire house floor to ceiling when the electrical work is done

I plan on a different layout- but not sure what yet. Also we need different furniture. This current furniture will move to our basement. I would love furniture and placement suggestions. Thanks!

I recommend a mix of lighting types -

1) Recessed lights for art work on the walls, or just to wall wash. Wall washing creates a very nice effect, and provides light reflected from the wall as well. It can help a room appear bright without producing glare.

2) Table lamps, or reading lamps.

3) For general light in the room a fan w/ light kit, or a semi-flush fixture. Fans can help reduce your cooling and heating costs. A semi-flush can produce not only downlight, but light that reflects off of your ceiling. This type will create an even general light, and it attaches to a junction box so you don't have to worry about the insulation. If you are not interested in either a fan or semi-flush you can use recessed lights.