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It would have to be quite high, like above the crankshaft pulley centerline. It actually makes more sense to me that the seal keeps water that gets into the bellows out of the bilge, so a failed bellows does not sink the boat....
I remember reading in a Mercruiser service manual that the seal is mostly there to keep the grease of the gimbal bearing out of the bilge. I remember the challenging job of cleaning the grease out of the bilge of a friend's boat. This was after we had pulled the engine. The oil pan was all sticky on the outside and there was that filthy water/grease junk over the bilge. Some of it had even made it to the bilge pump. It was a nasty job.
Not really …for water to be up that high it would be at the crankshaft level in the bilge. You would have a starter under water and likely water in the crankcase, least of your concerns would be a gimbal bearing then.
