Yep, it just drips out of the bottom. Every once in a while when I get to the machine there will be a few drops on the table just under the spindle. Over oiling isn't really a problem that I've com across, but I suppose if it was running out of the spindle it could be a problem. However, over greasing is a big issue. Increased parasitic drag and overheating as a result of grease churning can also reduce bearing life.
I put a thin o-ring above the spindle nut (for lack of a better term) and a thick o-ring below the spindle nut. This forms a labyrinth seal of sorts and helps keep coolant out and oil in, but it's not perfect. The results have been good though.
Interesting issue with the wood milling. I have milled some wood but it's not something I do for customers. And yes, I bet that steel is what works your bearings over.
I've been sticking with 4.5 cu/in MRR in Aluminum. It's been working awesome. I'm sure I could go harder, but I don't run volume jobs so it;s not a concern I guess.