You might want to install the free app Macs Fan Control 1.5.9 to see how hot the CPU Performance and GPU Proximity C values are. I don't need to use this app to force fans to run at a speed, purely just for heat information which its very good at. You also need to determine if your game graphics settings set too high a resolution or max FPS.
Yes the two smaller fans are way less noisy then the big single fan the 27" iMac used.
The heat is dissipated on the metal rear frame close to the stand. M1 24" iMacs are very good at cooling down when you stop something that generates heat such as a very busy action based game.
Same here with XPlane 11. I check the temps with TG Pro and the Performance core temps are around 90C for a few seconds and then go down to 75C-80C or so. If I push it I have seen it peak at 100C for a second or two and then goes down. The sim preforms great.
I not sure how it works in NZ. But it my understanding here in the US you only pay extra if it's accidental damage. If the chip was to fry from playing games I would think that is Apples design problem and they should fix it under applecare.