I like it, personally I would also have some kind of marker to show outwardly that the sword was in use, say milky or completely black eyes or darkened veins.
Didn't think of that, but I like the idea. I'd probably go with veins, myself, as it's more of a physical power than a mental one.
Going beyond the inhuman powers might be a bit much IMHO. I've always felt though that demonic co pilot should constitute some kind of mental and social protection since you're not in control, so 'getting through' to someone who has been subverted by the sword is hard to bring back. I'd do this in the form of mental and social 'armor'
You may be right about post-Inhuman powers; on the other hand, this thing's a murderspirit backed up by seven centuries of killing things...
On the second point- sounds like a general change to Demonic Co-Pilot to me, though you could also model this as a Compel to the Aspect related to the Sword forcing them to resist any attempts with an appropriate skill, which would of course pick up the Demonic Co-Pilot skill bonus.
Are you interested in making the sword able to turn PCs into NPCs if they use it or fall to it?
Where appropriate, yes. That's the main reason for the powerup mechanic- if you grab enough of those powers to hit zero Refresh, NPCtime.
I'd only want that to happen as a direct player choice, though, anything else seems against the spirit of FATE.
Also, I may put up a few ideas on what the Sword is and why it's so powerful...