On the older style rails with the 4 rails at 12, 3, 6 & 9 I think the rail panels were needed to eliminate the sharp edges.  Now the new slim style rails (with one rail at 12) are very comfortable and don't seem to need them.  I just picked up a couple of MI handguards (keymod & M-lok) and wondering should I buy some rail covers, but don't off hand see a use for them.

Do they provide any heat protection when doing mag dumps?  I wouldn't think so without a lining...  Am I missing something or are they more for looks rather than function?

I use rail covers on my full quad  because it gets too hot to hold sometimes. Hot plastic is a hell of a lot more skin friendly than hot metal.

Yes. Even on a modular rail, I cover the unused slots on the top with ladder type covers to protect them.  They weigh nothing and take up practical nothing. Same for the short mini rail on bottom front for a QD bipod when it is not attached (most of the time).

No hard covers.  Bulky.  Add girth and weight.  No-No for me. Modular rail is well vented.  Mag dumps are for mall ninjas and operator wannabes.  If you must, and ventillation is unadequate, wear a glove on the support hand.  That's what they are for.  Don't bulk up a nice free float modular rail.