You know that thing that Aqua does to her keyblade when she's fighting with Ventus-Vanitas? You know, it starts glowing blue and pulsing? Why doesn't your keyblade armor allow you to do that? Why is it just cosmetic in game? I agree that it could totally have been a unique drive form-like ability in Birth by Sleep, and you had some sort of cooldown until you could slap your pauldron again. I could even imagine it being similar to limits from Days.
That glowing/pulsing thing on Aqua's Keyblade there comes from her wayfinder, or more specifically from both Terra and Ventus "lending" her some of their power as an extra boost.
So it's more like a special D-Link feature with two people at once, 0.2 also plays with this ability of the wayfinders a little.
As for the Keyblade Armor's protection it does protect generally from Darkness, but how effective it is depends on several factors including the power of the Darkness "attacking" it.
In Terra's case not only is he facing one of the strongest known darkness-controlling powers in the universe, Xehanort, his own Darkness is also haywire and totally out of control due to Terra acting in a blind rage against the crimes Xehanort committed against Aqua, Eraqus and Ventus.
Xehanort even says as such in Blank Points, Terra's lack of control over his own Darkness and the unleashing of it beforehand when we saw Terra with that dark aura provided an entry point for Xehanort, so in the end the armor was simply bypassed.
An example where the armor does work largely as intended is in Dream Drop Distance when Ventus lets Sora borrow his armor as the attacking Darkness does
not reach Sora himself, it "only" possesses the armor itself, not Sora, buying time for Riku to intervene and save the day.