Customize the display of private and password-protected posts: change title prefixes, choose what content can be previewed, and style password forms.
No, not at all. This plugin is specifically for changing how password-protected and private posts are displayed. Changing these will not affect the password system at all.
That's fine. All plugin defaults are WordPress defaults. If you install it and don't change the values, nothing will appear different.
Tecnically, yes. This option inserts text directly into the <p> tag of the password form. That means that, while you could put anything in there, if you put something which is invalid HTML or XHTML odd things will probably happen. Additionally, you're site won't validate.
No can do. Because the text of the custom password form relies on having a custom function to call it, you must use one of the 'custom' options. It's practically the same thing. Is it that important to tell visitors "There is no excerpt because this post is password protected"? Because, in fact, that's the only difference.
Please, please do submit any ideas for the future at the plugin's homepage. If you can think them and I can program them, we've got ourselves a new feature.