In Regards to Sparring without Gear
I personally think all kinds of two person drills/sparring exercises can help towards the goal - but nothing's the full picture. Gloves and/or armour allow one to hit harder, but like you said, that finer use of the hands gets lost. Without gloves you generally have to be more careful, both of you still need to go to work the next day, and to be able to still work out the day after that. Push hands, san shou, standing grappling, technique drills all help other aspects as well.
Back in the early days of Luo's fighting career, I think they just used something like cloth gardening gloves and maybe a cup. Later they kept adding more rules. Some would favor certain kinds of fighting (for example if you make a throw worth more points than a hit, you all of a sudden have a lot more grappling and throwing) and some would add more safety gear or take away more targets. John Wang of EF put up a few of those fights from Taiwan in the late 70s/early 80s - and they didn't allow head contact at that point. Luo these days usually just refers to all kinds of non-prearranged sparring practices as playing. He uses that word on purpose.
If you are going to be sparring without gear - my suggestion is you do it with buddies and classmates that you know well and don't have ego problems with. Injuries are never worth it. If its someone "outside" or someone you know with more ego problems - well, at least for me its just not worth it. If you train for 2 months and then have to take four months off for an injury - how far ahead are you? Just do the math - its not worth it.
You can always alternate between more slow, controlled flow-type sparring and the full thing, or anything in between. Its best to start out slow, most people will start to cheat and speed up anyways (ego and human nature always get in the way at some point). Palms to the face are a good idea, for his safety as well as yours - its not good to train to bust your knuckles over someone's skull. I never used goggles, I got hit plenty in the eyes, but never serious. Sometimes having things like goggles there can take the innate fear away that you might have against getting hit there. Plus, you learn to change the small angles of your head so that you don't really absorb the force of the hit. Cups on the other hand... I just don't believe you can train to take even a glancing blow there.
Its also good to do a lot of technique or skill development within this type of work. You can just "play" with the plan that you are working on entering to get a good position for a throw, or play with the idea of only using bengquan, or whatever. You can always scale it back and have your partner "feed" you certain kinds of attacks over and over so you can develop your responses to them. Get that gross familiarity in there before honing it down, or altering it to slight changes in desired outcome or attacks from your partner.
Just play with it - no fear, no ego, just keep improving.
One way I like to look at some of this is:
Within our school, group, family - we are all here to help each other get better. I like to look at all this as degrees of cooperation to help each other get better and not as competition. Maybe that's just one feeling I get from the Asian "family" way of looking at things. I think this is the same attitude one needs to have in sparring and two-person work as well. The main point is for everyone to get better - no injuries, keep it at the level appropriate for whomever you are working with, gently push the boundaries, but keep safe and within the realm of whatever aspect you are trying to develop, and be honest in what you are doing. And like you guys pointed out ego is one of those things that tend to get in the way. Fear is another one.
Fighting's fun, keep it playful. Ego's bad, keep it out and you can learn. Everyone gets hit - (unfortunately) that doesn't stop being the case (at least not for me yet). So deal with it, with a smile! Relax.