The switch is to bypass the relay all together, so yes... I put it there specifically to defeat the relay, so if you want it back to stock you can do it. Definitely not necessary, but not a bad thing in my mind. I like the idea whenever I mod something (auto or guitar) of adding a single switch for the mod, so there's always a way back to the original setup. My insurance...
I've always gotten a rash of **** for doing things more complicated than they need to be done, but every now and then my "complications" turn into advantages in certain situations... I am my father's son.
The diode that I added is exactly for what you said... Current will only flow away from the Solenoid/Therm/IP with it there... No spikes going back.
The switch is between the relay, and GPC simply because that's where I chose to put it. With the diode protecting the pre-relay components, all you need to do is wire pins 3 & 6 on the switch together, and in one position the current bypasses the relay: +12v -> P2 -> P3 -> P6 -> P5 -> GPC, and the other goes through the relay: +12v -> P2 -> P1~relay~P4 -> P5 -> GPC...
It's just a "true" bypass of the relay. At least that's what they call it in guitar pedal and audio circuitry... You could add your LED into the mix right by the switch on the dash, directly from P4 -> GROUND... That way it would only light up when the switch was in relay mode...