I use the black PERMATEX aviation grade sealant that comes in a white bottle, and you brush it on. I've used the EVINRUDE stuff as well, but prefer the PERMATEX aviation sealant.

In searching for the gaskets I found quite a few horror stories about completely rotted out water jackets. Hopefully I won't find that. The engine runs well right now but I'd like to get ahead of a head gasket failure.
Should the head bolts be replaced as well?

If it still has the origanal 98 head bolts, no. They were stainless and outlasted the engines. The 93+ blocks were closed deck lost foam castings, and did suffer from quite ab it of corrosion issues since the design allowed places for saltwater to sit and collect without draining away.

they use to make cylinder caps for those OMC Loopers. it was a SS outter sleeve to replace the rotted out aluminum around the cylinder to head areas.

If the engine had compression that was even across the board would it be ok to assume that it's not corroded?

compresion won;t tell you about internal corrosion, only the condition of the cylinders, unless its corroded all the way thru the cylinders

I should have elaborated. I know that compression tests have no bearing on water jacket condition. What I was asking is if my compression is even across the board would it be safe to assume that the water jackets aren't rotten to the point of no return.
I really already know the answer. I was just hoping that someone would say that when the corrosion gets bad the compression turns to crap.
My engine runs great right now. I just have the visible corrosion at the mating surfaces and I'm a little hesitant in opening up a can of worms. At the same time I don't want to wait too long. Pretty much feel like whichever route I choose I'm going to wind up on the wrong end.

It's a catch 22. These engines are getting old enough that even taken care of engines are getting corroded beyond the point of no return. It is just teh nature of salt water. Your rolling the dice either way.

I'd say if it's running fine run it and leave the heads alone.