Hi Tom.
Not a nice Luger.... A GREAT Luger. I am of a different ilk than the majority of the board members, who, it seems, are far more enamered with a little finish than the historical significance of an item.
1) The suggestion to get a price from some web site like
http://www.simpsonltd.com/ is the most valuable information here to for on price. The insurance company is not going to ask the above for opinions in all likelihood. they normally just want "replacement value". Talk to your insurance agent and find out what the company will accept (and certainly offer the "expert" opinions above if they will accept them--probably much more accurate).
2) IMHO the addition of an "original" holster will be of little import and more cosmetic than anything because you, at least, know it is not original to the history of the gun.
3) What I would do with that gun is build a wall display case where it, the papers for it, his service ribbons or medals, unit patch(s), an annotated map of his path in Europe, a copy of his DD-214 and a write up of this story could all be proudly displayed for your families heritage. No holster or extra mag needed.
4) Shooting. The real value in that piece has nothing to do with it's condition. Some people can't see past a dollar sign. If shooting it brings you closer to him then don't hesitate.
All my guns are just pieces of metal and wood. Yours is a piece of American history.
I'm jealous.
Gary