Spiritedlondon I am so sorry for your loss. 
I really do not know there is a right answer here. It is choice and to be honest I think parents should make that choice, not random strangers on the internet. But I know why you are asking, to see if you are being unreasonable. You are not being unreasonable.
My mother died this year, my kids were 5 and 11 at the time. They both came to the wake and we asked them whether they wanted to come to the service at the crematorium. My five year old son did not want to come, which was fine, he stayed at school and dh picked him up after the service. My 11 year old dd did come.
This worked well for us.
I think a service with coffin etc can be traumatic for kids. If you really cannot bear the idea of your daughter coming then I think you need to tell your dh. But if you can face it and she wishes to come then make sure she knows what to expect. The coffin will be there, the body of grandma will be in the coffin. What you tell her about granny's spirit etc will be up to you. As Christians we said about heaven etc. But even if you believe nothing about an after life you can still say that the body left behind is not the person who was loved by all the family (in age appropriate words).
If you cannot bear for her to go, can you get someone, a good friend or whatever, to sit with her at the venue for the wake?
My sister and I actually chose to have our mum's funeral local to me for childcare reasons (she lived further away but family were more local to me so it did make sense). But I realise you cannot make any changes here so you would need to take someone with you to look after dd (your parents?), if possible.
I think funerals do not necessarily teach children about death, they can be distressing, it is hard to see adults very upset, and unless it is a parent or sibling there is really no reason to burden a young child with this experience unless the child really does want to be included.
Adults who are grieving the loss of a parent should still be able to put the needs of their children first, IMHO.
Although some people clearly resent the fact they were not allowed to attend a funeral. Which I find a very unusual idea, perhaps a misplaced guilt about not being able to be there. But of course as a child it would not be the child's fault for not being there.