The smallest insulator goes inside the hole in the plate. It keeps the screw from grounding out on the plate.
The light should turn on when the points open at the F mark; the spark happens when the points open. The light should go out when the crankshaft rotates approximately 1/2 turn, or 180 degrees, when the points close. The time when the points are closed is called "dwell", and is also approximately 180 degrees of crankshaft rotation. During this time, the ignition coil is charging up, getting ready for the next spark when the points open. If the point gap is too big, it will shorten the amout of time the points are closed, giving the coil less time to recharge, which can affect the strength of the spark at higher RPM. Since the light is turning off and on now, it looks like the original problem is fixed. Like Maui suggested, you should get new screws, because yours look pretty buggered up.

The lower screw that holds the main points plate to the engine is missing a plain washer like the other 2 screws have.