1. I know that the service account requres "dbo" permissions to "Master". Does it need to keep that permission or can it be removed and given lower level permissions?
Once the database is created during install. you can lower it.
2. Does SIM require its own Instance of SQL or can SIM share the instance wtih other Databases? Our plan is to use this as a shared SQL server.
We recommend it's own instance but works while being in a share.