Is it stupid to replace redwood siding with Hardi board or LP SmartSide?
I'm with your painter. It's like throwing out a pair of Allen Edmunds because there's a hole in the sole and replacing them with a pair of Timberlands. 

Find out what it would cost to repair/replace the split boards. It'll probably be cheaper than redoing all the siding in a new/cheaper material. In addition you might lose some value in your home by removing the redwood siding. 

Have the insulation contractors blow the insullation from the inside. Much easier to repair drywall and you don't have to worry about poor repairs causing water infiltration. 

Maybe find a better contractor all together. Some people just do what they know and they may not be familiar with other materials and methods and they wind up talking you into paying more in time and meterials to do things their way.

I was just talking to someone the other day about their garage door. They used to have a very nice wooden garage door but when they got an automatic garage door opener installed they were talked into replacing the door with a poorly insulated metal one. Something about the opener not being able to handle the weight of the door. This was for a single car garage so that shouldn't have been the case. Anyway point is... This was many years ago and they still regret the decision.