I have a Cross Check outfitted with a SON28/DT RR1.1 front wheel powering a Supernova E3 headlight and taillight. I do not turn them off, and I can honestly say that the drag effect is not on my list of concerns. This bike is my commuter and my LD bike, and I've done rides up to 400k with it. Riding all night means having a lighting system you can be confident in, and the generator is definitely it.
Now, the SON hub is a pricey little bugger and there are reliable and far less expensive ways to go. I was actually just pricing out parts to build a new generator based front for another of my bikes and found that I could build up a good system for under $300.
Sun CR-18 rim = $36 (Velo-Orange)
Shimano 3N72 36h hub = $95 (Harris Cyclery)
DT Champ. spokes = $28 (LBS)
B&M Cyo lamp = $120 (LBS)
Total = $279
One thing to consider with a generator system is that you do need to have a helmet mounted "work lamp" in case you flat out at night. Unlike a battery based system which you can use as a task lamp when the bike is stationary, a generator system is only providing reasonable light when you're moving. I prefer the Princeton Tec Quad; 4 LEDs, 3 brightness levels plus a blinkie mode (good for foggy roads or signalling that you've fallen off the back and need a regroup.)
As for the generator lamp itself, stay away from halogens for 2 reasons: They're easier to damage the bulb, which if you're riding at night is immediately noticeable... not so much during the day, and running on a broken bulb can damage the entire system. Bulb intensity isn't as great as new, modestly priced LED lamps. The IQ Cyo and Fly series are both plenty of light for the average rider and can be had for $90 - $125.
Regarding the concerns about LD riding being more of a challenge with a generator hub, read this article from BQ about
Jan Heine's 2007 sub-50hr PBP finish. 1200km through wind and rain and dark of night on a 1973 Alex Singer with a SON28 hub and Schmidt E6 lamp. Sure, Jan is just fast as all get out to start with... But even he admits (on the time penalty system for the Cyclos Montagnards) that the difference between a generator and battery system is a minimal 1.5% (non-generator equipped riders are assessed a 1.5% overall time penalty on Cyclos Mont. events).
While that may make a world of difference if you're trying to qualify for his very elite group of long distance riders, the difference of an extra Watt or two at the cranks to overcome the hub resistance of a generator is insignificant.