At what depth am I supposed to install this seal? Flush?

 

I guess this would help.

 

Drive the plug in until the edge is just below the chamfer on the outer face of the block. If it goes in to far the cam will not be able to go in all the way.

 

Right; just under flush.

Use the purple Permatex sealer, Brush Tack or whatever they call it. Sand around the edge of the plug with some 100 grit or so sandpaper to rough it up and make it stay in better. Coat that outside edge of the plug with the sealer, drive it in flush with a piec of 2x4 or something laid flat against it and one might whap with your BFH; then tap it in gently about 1/32" - 1/16" or so with a large socket or something, and wipe some sealer around the edge of it.

Freeze plugs in the water jacket should be done the same way. Since those are brass though (hopefully...), they're even easier to distort if you install them carelessly.

 

I have some GM assembly adhesive that's specifically for oil. I should be able to use this, correct? Maybe my Teflon sealer?

 

Don't use Teflon on freeze plugs. It's a lube. You want something that will keep them from accidentally popping out, not something that will make it easier for them to slide back out.

I don't know about whatever GM stuff it is that you've got. Not all adhesives are equal. Apart from "quality", there is the matter of suitability for a specific purpose (as above).

I know for sure that what I recommended, works.

Use something that hardens.