"Can the iMac handle a dual monitor setup?"
See
http://www.apple.com/imac/specs.html
Mini DisplayPort output port with support for DVI, VGA, and dual-link DVI via adapter4
Support for extended desktop and video mirroring modes
Simultaneously supports full native resolution on the built-in display and up to a 30-inch display (2560 by 1600 pixels) on an external display
"what are the advantages of a dual monitor setup?"
Some people believe that more screen real estate is better.
"would I benefit from a dual monitor setup?"
I would say NO as you wrote: "email, web browsing, ichat, ilife, iwork, and mostly word processing"