Correct. The TOD has no way of knowing if the hubs are locked or not. If the TOD is still functional, then unlocking the hubs means that the front driveline is still being turned from the transfer case but the final connection to the wheel is missing.
Before I put the locking hubs on, I was very reluctant. I didn't like the driveline spinning unloaded. After installing them several years ago (for towing purposes), I've found that it doesn't bother the transfer case at all. Think of it this way, try running an engine with absolutely no load on it (not even a flywheel). The second you run up the rpms, nasty things can happen in the engine. All the mechanics are designed to drive a load & with none there, all the gears are not meshing as they are supposed to. Gear chatter & vibrations will eat the engine very quickly.
If you install the locking hubs, several members have discussed TOD cutoff switches that you could do as well (or just unplug the TOD computer under the passenger seat). Frankly, I'd just go for the locking hubs & be done with it. The TOD clutches were designed to last a long time. I don't think you'll have any issues after the re-build even if you don't put on the locking hubs.
BTW, you should be able to pick up a set of used hubs from a bone yard for $50-100. Marlin (not Merlin) may even be able to find you a set even cheaper (he seems to be pretty well connected for that stuff).
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