Frank --

"...if his temp drops markedly when running the car heater--definitely so in my situation. What does this mean?"

Generally it means that you truly have excess heat (as opposed to an errant temperature reading) and the normal heat exchanger (radiator) is unable to dump all the heat. I'd first check for external and internal plugging of that radiator. The B21/23/230 engines have the aluminum head, and with the iron block you can get some strange electrochemistry producing a cement-like deposit inside the radiator tubes (aluminum oxide, probably).

"...lose some coolant from around the seal atop the water pump (between it and the cylinder head)..."

Time for a new "mushroom" seal. One common cause of seal failure is oil soaking from a leaking cam seal. Oil will cause rubber to soften, swell, split, and fall apart. One cause of leaking engine seals is a plugged crankcase ventilation system, including the flame trap.

Dominos -- one thing leads to another.

"...replace the pump, do aftermarket models come with necessary gasket and seals?"

Dunno -- I've never installed a new aftermarket pump. Call or email one of the suppliers listed on the BB and ask that very good question.

"Should I buy the pump from the dealer?"

Personally, I'd go for a Volvo pump if I intended to keep the car. Shop for price among the dealers who sell over the Internet.
--
Don Foster (near Cape Cod, MA)