I too have been to "dry" weddings and non-"dry" weddings. I believe it is a personal preference and most definitely helps with keeping the cost in check. It should be your decision and most family and friends will respect that.
I have not personally heard of purchasing the type of insurance you posted about, so I can't help out there. I would suggest weighing your options regarding that and definitely check out the company with the Better Business Bureau just so you are covered.
It is absolutely 100% up to you and FI as to how you want to celebrate your day. We didn’t have a dry wedding, but that’s not what DH or I wanted. I have been to a couple of dry weddings before. The atmosphere was different and they ended very early (although a few had tail gates in the parking lot – very disrespectful and caused a lot of problems).
I think a GREAT DJ would be key to get the party going. As long as you make those invited aware that it will be a dry event, you should be fine. I wouldn’t be happy if I shoed up expecting alcohol and there was none, but would be perfectly fine if I knew ahead of time. Good luck x