It has been about 4 years or so since I hooked up my SMS-1 to my 990 and tinkered with it, but I am pretty sure that the L/R connection method that you are referring to is mostly useful when you do not have bass management available. Since the 990 does have bass management, I would use the sub out.
If I understand your second question correctly, the answer would be yes, you would lose the LFE since anything below the cross-over frequency would go to your sub out (which would not be connected in that scenario). If you are determined to connect this way, you could go to the 990's speakers settings and indicate that you do not have a sub.
I am not sure if you saw this, but Outlaw created their own manual for the SMS-1 called "The Outlaw's Guide to the SMS-1". I highly recommend it:
http://pdf.outlawaudio.com/outlaw/docs/sms1guide.pdfI hope that helps.
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