This has been on my mind recently as we are amending our wills and have just spoken to my sister about her and her husband becoming guardians for our girls should the worst happen.
I am assuming no similar discussion was had with you and your hubby? Whilst I initially was really sad and cross at your hubby's reaction, he may be feeling protective of your own child, thinking it may negatively impact their life as less time and money for her. Or shocked if it wasn't discussed. So maybe reassurance is needed over how it could work.
On that basis, there are a lot of benefits to having a sibling (which this would be similar to). Maybe highlight these.
More practically, you mentioned it being hard as lo in nursery and niece starting school. A lot of primary schools have preschools attached, so from the age of your lo turning 3, you could have one trip as opposed to 2 seperate trips to nursery and school. If parents (from either side) are around, I'm sure they will be understanding if spoken too and could help too with school drop offs and pick ups to support this arrangement.
Again, also on a purely practical note, I assume you would have some financial support for taking on your niece as everything would be left for you or her (sale of cars, house etc) and parents would want to support.
I am so sorry for the loss. But I am sure your sister would be grateful and proud of you for stepping in. This love between you demonstrates one of those sibling benefits I mentioned xxx