John Siracusa's detailed Lion review covers the new FileVault disk encryption feature in great detail:
http://arstechnica.com/apple/reviews/2011/07/mac-os-x-10-7.ars/13#lion-file-system
To summarise, the new system is "volume" based. This means that not all volumes can be or are encrypted. The Lion recovery partition for example is not encrypted. Non Mac volumes are also not encrypted (FAT, NTFS, ExFAT, etc).
From John's description it does appear you can have multiple encrypted volumes. Whether or not they can use different passwords is unknown to me. Some use of the diskutil command may be necessary to achieve this if possible.
The difference with method 1 is that, with method 1, you're not actually converting anything. You're erasing the existing data and replacing it with an encrypted partition. With method 2, a conversion process begins, which doesn't erase data, but does take more time.
The thing to keep in mind: any drive which is converted from a normal drive (HFS+) to a Core Storage drive can be reverted back to a simple HFS+ volume (non-encrypted). If you use the Disk Utility method you showed above, the resulting disk will NOT be revertible, because the disk will have never been an HFS+ volume in the first place. That is what you're seeing with "Revertible: No". If you use the Finder method (or the equivalent command-line option), the drive will be revertible.
Another thing to keep in mind is that modern versions of OS X will normally use Core Storage on the boot drive by default, even on unencrypted disks. The result is that, in some cases, "Revertible" may always be "No". You'll always be able to decrypt a Core Storage volume however, so perhaps this is insignificant for most people.
If you want to talk about what's the best option for Time Machine, it doesn't really matter. The end result is, in either case, an encrypted disk, protected by a password. To do anything to the disk you would need the password. There isn't any significant difference to either method. It's marginally possible that the disk utility method could be the slightest bit more secure, for the simple reason that this reduces the number of attack vectors. If there is any benefit, it would only be slight.
Best Answer
No, it won't be as effective. Encrypting before writing anything (/anything important) is the best (most secure) option, but if you miss the opportunity to do that there are still methods better than retroactive encryption.
(Note: this is mostly inapplicable to the built-in SSD in newer Macs with the T2 chip or "Apple Silicon" CPUs, since they automatically encrypt the data volume, with an encryption key protected by the Secure Enclave. Turning on FileVault on these models doesn't encrypt the volume, since it already is encrypted -- it encrypts the encryption key. However, any data stored on other volumes or other SSDs is not protected by this, so the following discussion does apply.)
When you retroactively encrypt a drive, what you're basically doing is overwriting the old (unencrypted) data with an encrypted version. Overwriting the whole disk with zeros or random data is better for several reasons:
There's also a problem that even overwriting with zeroes or random data doesn't solve: the SSD itself doesn't expose all of its storage space to the computer, so if you erase/overwrite "everything" from the computer... you haven't actually erased/overwritten everything. Reading the hidden residual data generally involves disassembling the SSD and bypassing its controller to read from the raw chips, so it's not something people are likely to do unless they think there's something of serious value on your SSD, so you probably don't have to worry about this. See my answer here and the links in it for the gory technical details. Long story short, overwriting the entire exposed space twice is generally -- but not necessarily -- enough to overwrite all the actual data.
So, in summary: if there's something of really high value on the drive, either don't ever write it unencrypted in the first place, or physically destroy the drive before disposing of it. For reasonable-level sensitive data (e.g. your banking info), overwrite twice with zeroes and/or random data before selling/donating/whatever.