Eli Zaretskii <eliz@gnu.org> writes:

> Let's please discuss your ideas before you implement them, to make
> sure you don't work on some ideas that we might object to.

Sure.

The code needs to run each time the cursor moves, (is there
a function/code that do this?) and each time user changes window
(because cursor color is not buffer-local).

I think that using variable watchers would be better and keep
this defcustom (it will only use variables):

#+begin_example
(defcustom cursor-indicators
  '((overwrite-mode . "red")
    (buffer-read-only "green" hollow)
    (current-input-method . "blue"))
    [...]
#+end_example