The "service" light comes when it is time for an oil change, not to be confused with the check engine light. If the CEL is on, go to an autoparts store and borrow or have them read the OBDII codes and clear them. Then find out what the codes mean.
Normally, if the thermostat dies it does so in the open position, allowing coolant to circulate all of the time and your temp gauge will read cooler than normal. If the thermostat is NOT a Volvo product, it may be stuck closed and that will result in over heating because the coolant is never circulated through the radiator.
The coolant temp sensor can malfunction. That usually results in a CEL being on, but not always. It can be checked with a voltage tester, checking the Ohms between the two contacts on the switch and determining the voltage resistance compared to the temperature. Seldom does a faulty ECT sensor cause a hotter than normal reading in the instrument panel.
Your over heating problem could be the result of a failed engine fan relay, not allowing the fan to run while you are stopped or in slow traffic.

Klaus