I am so glad you posted this. I was just given my grandmothers (who passed away)wedding and engagement ring by my dad on my birthday last month and I was torn on what to do as well. It is set in yellow gold and is lovely, about .5 carat diamond as well. I am married and already have a beautiful 1 carat ring from my husband so I dont want to replace it, but I was torn on what to do with my grandmothers ring. I feel guilty turning it into a necklace, but I know that is probably the only way I will really get to enjoy wearing it.
Wear the ring as-is as a pendant? Best of both worlds - you'll get to wear it and keep it intact.