Is it possible? Or does the newest version overwrite the older one, even if you install it in a different folder?

Good question, I've never tried it on windows. But it is possible to do on a mac computer. Mainly because on OSX all the program's files are within the program package. Whereas, on windows it's a little different, such as registry additions. One issue you might find however is with a different version, the incomplete files might refuse to load when loading the earlier version. If the earlier version is LW 4, that's not a big issue, you can resume them from incomplete folder in library window.

It doesn't really matter if the incomplete files become useless if I load the client. All I wanna do really is testdrive the new Limewire version without the hassle of having to uninstall and reinstall the older version.

And I know that some programs update the registry keys associated with them when being installed instead of creating new, so installing it in another folder doesn't really matter. The old version just goes *poof*

Perhaps backing up might help ... as well as a system back up so you can backup to a certain time. But backup the program also.