A simple clone would suffice, clone the internal HDD to an external HDD, then when the machine is back, boot from the external HDD and format the internal HDD (or the Macintosh HD partition if one also runs Windows or any other OS on another partition), and then clone the external HDD to the internal HDD.
Boom. Not as fast as only using an external HDD, but faster than a reinstall.
Not if one created a bootable installer out of the Mac OS X 10.7 Lion or OS X 10.8 Mountain Lion installer.
I for example have all my Mac OS X DVDs (Mac OS X 10.4 Tiger to Mac OS X 10.6 Snow Leopard) and downloadable installers (Mac OS X 10.7 Lion and OS X 10.8 Mountain Lion) cloned to an extra HDD and also made DMG/CDRs out of it, thus I have an external HDD with all installers I need for my Macs or other Macs, if the need arises.
No Mac coming with Mac OS X 10.7 Lion or OS X 10.8 Mountain Lion has physical restore media included.
There's my problem, right there. I'm on SL, with no intention of ever upgrading to the non-physical OSs, and that ***** AppStore.
I have all the same backups as yourself - including all combo-updaters, from Panther to SL, and clones of Panther, Tiger and SL.
Wiping the drive and installing a clone is an option that I have used before (for a corrupted System), but that won't help if the Mac suddenly stops working - whatever is on the internal drive stays there. Better to not put it on in the first place if security is of concern.
As for encryption, I have a need to quickly access words in large context from thousands of docs, and cannot afford the hassles involved with making said files easily readable to my search app.