It is a superb episode, and one of my absolute favorites.
I love the atmosphere of it, the strange sense of phantasmagoria it's got going on. But that moment with the red shirt stands out like a sore thumb, and is made even worse by the ending (Picard has a pleasant little chat with Nagilum and gives it props for it's curiosity, apparently forgetting that one of his crew has basically been murdered!).
It isn't enough to ruin the episode for me though. Just a little niggle.
I've always seen that as evidence of Picard's professionalism. As hard as it is to understand for us, I expect a lot of death in space exploration has to be seen as "fish gonna swim, bird gonna fly", aliens do not understand our values, morality or emotions, and therefore might see human life as cheap, or not associate it directly with value. Nagilum seems to not even really understand death.
Therefore Picard is conditioned, although likely hurting inside, to maintain a professional facade with murdering aliens. He is relatively personable with Q, who was responsible in Q-Who for the deaths of 18 of his crew (albeit not directly).