What? The correct behavior here is to realize that the target no longer supports iMessage and return to non-iMessage behavior. This should involve swapping the UI from blue back to green so the user is aware.
This is what happens. The setting is only what happens automatically: if the UI is blue and it fails to send. When it fails to send, the message is marked failed (with a red exclamation point), and then the UI switches to green because the recipient is not connected to iMessage.