You guys are absolutely right, the fun is the main thing on flying the sim. There will always be a "too much" and also "not enough" in everyones eyes and it's hard to find the right spot for all people.

A question towards the update, Mark. Does the update flag show that there actually is an update going on?

You can, most of the time, completely drop the elevation data, it's optional while you should be accurate on the position of course.
The closer you are to VORs with that DME and the lower you fly above them, the more important the elevation data could become although it never really reaches critical values.
"Update" means a constant measurement from the CDU units and isn't bound to that one moment when passing the VOR station but to the numerous others when you've passed that thing.

Enter nothing and 0ft is assumed for its elevation.

An example.
Being right above an VOR at 37000ft, will give you a DME reading of 6,089532587 (which would be really accurate for our cockpit instruments, they will show "6.1" instead).
If the VOR was some hundred feet higher than 0, lets say 600, the DME reading is 5,99078341, so the instruments show "6.0".
I don't how the INS handles elevation data when you are very close but I assume a focus on the actual DME readings as they get more accurate when being closer.

As said, fly lower and let that VOR be at higher elevations and the error gets bigger, but since you mainly need DME updates at higher FL, you will often enough find yourself traveling well above them.
The error component isn't big there and if you are not exactly above them (which will be the case most of the time since you don't hover there), the distance between you and that thing is the vital part.
This distance is shown on the DME gauges and the real distance is calculated then since the DME readings shows the hypotenuse of that right-angled triangle.
Being exactly above the station, there is no triangle but this situation takes place just in theory. So most of the time, your "hypotenuse measurement" and the accuracy in the readings there play the big role together with a good and accurate initial alignment of the INS at the departure airport.

Also, the height component comes in at the "feet" value while you travel fast enough to collect quite some nm on the distance component. Approximately 6,076 feet in 1nm.
Since both components get into calculations on their square value, the nautical miles gain quite some strength over the maybe height deviation as you travel along.

The more you travel away from that thing, the more insignificant the elevation gets.
The whole system of your position calculation has quite some vague values in it too. The coordinates of the VOR are entered in not so exact values (only few digits), your VOR DME receiver has internal fluctuations, the signal itself is under influences of various things .. those influences gain strength when getting away from the station, so the inaccuracy there is normal and quite high when compared to that missing elevation data (which just causes deviations of some feet).

So in short, the update doesn't depend hugely on the elevation data and the double update with one station on track and another one offtrack is the best thing to do, with or without elevation data but regularly done.
The INS will always stay far away from GPS based units but even those use DME updates on the FMC birds.