Whatever surface is riding on the inner lip of the seal is the one that matters. Also make sure you're not nicking the seal with the splines. Shouldn't, because there is a bit of clearance, but a rubber glove over the splines helps protect things.
As far as how deep...I usually get them flush. If it goes beyond, you might be missing the seal surface, (for the record, I don't know if this is actually happenening in this interface). When I'm driving a seal, I look for a driver that catches the seal and its boss to help prevent from going too far.
I do know when I did mine...the transmission came from an LJ with a 231. When I rebuilt my T-case (a 241OR) I replaced the input seal and it went a bit deep. I thought I would have to pull it and replace it, but decided to try it anyway. Its been dry since day one. Since you have the Terraflex front half, you might be on the edge of a good seal? I dunno...
I’ll compare the snout of a 231 with my Teraflex and see if they’re the same. Then I’ll take some measurements when I get back in there to see how much seal engagement I’m getting.
If I remove the TCase, can I just clean it up and shake it like crazy to see if there’s a leak? Then that would be a known entity.
I’m tired of messing with this, so I may take a few days off.