I agree the story is the high point of this, not because the story itself is particularly novel, but because of the way in which it is told. It carries atmosphere and plausability, the description of the sea witch was what really got me.
I'm personally not fond of the item, as others have said there are many objects that drive a person mad with desire for it. It is well presented, and its incarnation as a teddy bear adds that nice creepy feeling. I do wish it weren't pink, that just screams "I have something wrong with me and you should pay attention!" The detailing of the deamon is nice as well, and actually provides some reasoning beyond "he's an evil deamon".
This is a good and interesting plot, but the premise doesn't sit well with me. Mostly because it turns the wife into a sort of psychopath. After all, if both of them are dead who would look after her child? If she cared at all for either of them the plot seems to fall apart. It would make more sense to me if the assassinations were keyed off of some sort of action on his part, like getting remarried. This would also turn the new wife into the prime suspect, as he would have inhereted a good deal of money from his previous wife. No one expects a dead killer.
I see no real reason to make the book intelligent, but I do like the risk/reward balance it presents. It's also very powerful, and the limitations are not very well defined though I suppose that is intentional. This makes a better idea than a submission.
I approve of this plot. It is a fully completed idea which can be stripped down to more basic elements (the idea of monsters protecting a town for some reason). While I like the twist Scrasamax put on it that still leaves the question of why they were not attacked by a large army before, which could be an entirely different plot in itself.