I completely understand the angst over this decision as I'm doing the same thing myself. I think the answer to your first question is "no", if the iMac dies you can't use the screen as a monitor from another computer.
Here are a couple of other things to consider...
The Mac mini is currently Core Duo rather than Core 2 Duo, that makes it a bit slower and not 64-bit.
The mini is mostly based on laptop parts and therefore gives you smaller and slower hard drive options. Most folks agree that the slower spinning drives definitely affect performance.
The graphics cards and options are better in the iMac line. With the mini you have no choice and get the lowest quality (though it's generally more than adequate for non-gamers).
What peripherals do you already own? If you have a good USB keyboard and mouse and a nice LCD, the mini is a good choice. If you're going to buy these items, and considering the performance and option differences, you'll probably find that the iMac is a better deal.
Now... what did I do??? My teenage son had an IBM laptop that recently died and we got him a low-end iMac. It is seriously cool and exactly what he wanted. Since he didn't have good peripherals already, this was an easy choice.
I was hoping that yesterday's announcement at MacWorld would include an upgrade to the mini, but no luck.
With the new OS is coming in a few months, I'm going to wait until it's released and then buy what best fits my needs. I have a great 20" widescreen monitor and would prefer an upgraded mini. If that doesn't happen, I might just spring for the 24" iMac.
Either way, as MartinS recommended, AppleCare is an option to consider if you're worried about hardware failure.
Have fun with the decision and whatever you do, you'll never regret moving to the Mac platform.
