How do you upgrade this system with a SSD

To add in a PCIe SSD your system needs to have the required connector some models are missing the hardware (many 2012 models don't have it). Review the IFIXIT teardown for details: iMac Intel 21.5" EMC 2638 Teardown

If you have the connecter you can add in a blade type SSD. Here is the IFIXIT guide you'll need to follow: iMac Intel 21.5" EMC 2638 SSD Replacement. If you have never opened a iMac this is not something I would recommend for a first timer. Between the complete removal of the logic board just taking off the screen assembly can be dangerous! Many people have damaged the screen just in taking it off which would be an expensive mistake. Make sure you use the correct tools and take your time.

The only rub here is locating the correct SSD unit. So far Apple is the only source (new) or used on eBay (some are not even the correct units!) In either case they are very expensive.

Your other option here is to not open the system at all and use an external Thunderbolt drive which is what I would recommend here. We use these: OWC - ThunderBay 4 mini with SSD units. The Thunderbolt SSD RAIDED connection is just as fast as the internal PCIe blade drive and is cheaper and less risk!

As to your direct questions:

1 - Adding a SSD does not effect your SATA HD drive. You can continue to use it or after backing it up reconfigure the the two drives to be a Fusion Drive set (logically one visible volume)

2 - Sorry no, no options here. This series uses a custom part made for Apple you need to use an Apple blade SSD. To add to this this series uses a 4 lane version which is why its even harder to find than the older 2 lane version. And, no I wouldn't recommend using the older PCIe SSD in your system.