I went through this a year ago when purchasing our current boat. The surveyor told me the Paloma would have to go. No longer approved for enclosed spaces such as boats or campers. This change came from someone who showered so long without ventilation, they ran out of oxygen and died. Most of us would never let anyone shower that long so it must have been a BIG boat. Nevertheless - BoatUS and two other companies made removal of the instant heater a condition of insuring. You can do what you want, but IF you had a claim for fire the Ins. Co. might not pay. If you go that route, I would ask them first, since others have claimed to get a different answer.
We went with the IsoTemp w/ exchanger running off engine. We avoid docks and have to motor a channel to get to our mooring anyway, so I look at it as free HW. It heats quickly. The tank is super insulated so you can even shower again the next AM. Having a shower on a boat is a priority for me. Salty sheets are not. I view it as a standard piece of equipment most expect on a 35 foot boat. Our marina has nice facilities, but I like having my own. It is great cruising since we are only on a mooring or anchor. I'm pleased - but it was pricey.
"We have met the enemy and he is us." - Walt Kelly's Pogo