I think pumps are great tools for managing diabetes in young children, primarily because they allow for quick adjustments to basal rates and the delivery of VERY small doses. For a growing child, these characteristics can really result in better overall control. Pumps also give more flexibility, which I would think is important when dealing with a young child.
Pumps work by delivering small amounts of fast acting insulin at variable rates throughout the day (called the basal rate). These basal rates are determined by you and the endo, and they can be temporarily adjusted for things like increased activity levels or illness. In addition, each time your daughter would eat, you would deliver a "bolus" of insulin. The bolus is calculated by the pump after you put in your daughter's blood sugar level and the amount of carbs she's eating. The pump then calculates the amount of insulin needed based on that information.
If you are even considering starting your daughter on a pump, you should read Pumping Insulin (available on Amazon). It's the bible of insulin pumping. Read it a few times. In addition, there are some great videos on YouTube (just go to YouTube and search for "insulin pumps") that show people changing their infusion sets and operating their pumps). In fact, here is one of a parent operating their child's pump - http://www.youtube.com/watch?v=L1zs_LYOiB4.
Overall, the pumps are not that complicated. I think they can be overwhelming for some people, but my iPhone is way more complex. That said, pumps take a lot of attention and patience. The first 6 months can be a rollercoaster, and I think this can be even harder when dealing with a small child who cannot communicate how he/she feels.
As an adult, one benefit of pumping I've found is that my highs and lows are not as severe. I can usually catch them faster and correct them easier.
Most kids keep their pumps on just fine. Yes, infusion sets do get yanked out from time to time I'm sure, but it's pretty easy to stick a new one in. They also are stronger than I expected. The newer ones stay in very well. I use the Mio and with a little Skin Tac and some IV3000 film over the site, my site easily stays in for 4 days (and I'm about as active and rough as your average 2 year old).
I know the Minimed Revel (the pump I use and the one shown in the video I posted above) have a lock feature. You can lock the pump so that a child cannot accidentally deliver insulin.
As far as sleeping with it, I am really not bothered by it. You can get used to just about anything and that includes insulin pumps. Small children are even more adaptable. She may be bothered by it initially, but once it becomes a permanent fixture in her life, I am sure she will be fine. Many children also keep their pumps stashed in little pouches or Spibelts. There are quite a few that are specifically made just for pumps.
Do your research and start talking with your daughter's endo about beginning the process for getting a pump. You will likely have to take classes and do some one-on-one training, so get that done as soon as you can. Also, the process for pump approval can take some time, so be prepared for a little bit of a wait.
Most importantly, remember that the pump is not permanent. At any time you can take it off and go back to MDI. That said, I think most people like their pumps so much that they wouldn't dream of going back to MDI. I know I wouldn't!
Finally, really research which pump is best for your daughter. I have the Minimed Revel (it is the one shown in the video) and personally it would be the model I would pick if getting a pump for a small child.