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The new seal should not be flush with the dif case. It should be just like it is on the OPs pic. I would install them dry though. If you look at the old seal, the issue is, the old seal doesn't have much surface area it touches on the CV axle itself. The new seal doesn’t go in as far so has more surface area on the CV axle to seal on. The worthless “dust covers” actually encourage the build up of dirt. Tap them off and get rid of them. They do nothing beneficial for you and they may encourage leaks.
 
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