First off, the idea undead can see invisible people but pretend they can't out of a sense of decorum is brilliant. It invites the question, "what is the etiquette of the dead, and what happens when & if they violate it?" - which I haven't had enough coffee (or maybe bourbon) yet to properly answer.
My advice would be to pick an explanation for undead vision and then work out some interesting implications.
Quick example: undead see life force.
Implication: the closer a person is to dead, the less well undead can see them.
So maybe PCs can "hide" from undead via self-inflicted wounds.
Maybe it's easier for low-level PCs to "hide" from undead -- i.e. character level = life force -- giving lower-level groups incentive to rob tombs full of more powerful undead they can't win straight-up fights with. This also creates an incentive for higher-level NPCs to hire scrubs for tomb-raiding.
This opens up space for custom spells with interesting trade-offs. Like an invisibility to undead spell that works by allowing the target to operate at 0 HP.
Maybe you interpret "close to death" more loosely, allowing PCs with debilitating illnesses (but full HP) to conceal themselves from undead.
Etc.
The life force idea is really neat. I love this sort of detail because it allows for clever tricks on the parts of the players like your self-inflicted wounds. It also opens the possibility that some life forces might be too "bright", such as a particularly holy cleric or a divine figure. Wraiths, skeletons, wights - they might raise their wrists to their eyes when someone casts a healing spell, cluing the players in to how the undead vision works, letting them come up with plans like the self-inflicted wounds.