By "inline within prpc" do you mean within a RTE or TextArea control within PRPC layout?
If 'editing the word document by launching Word and saving it back when user is done with editing' is okay for your requirement, then you might want to look at "View/Edit in Microsoft Word" feature available for Specification rule types.
Yes word merge feature requires Silverlight plugin at client side, for Pega 7 version. Silverlight is introduced for cross browser compatibility. But latest Chrome browser removed support for this plugin, so works only in IE. Not sure about other browsers like Firefox.
I am not sure if in the use case edit scenario, whether the word document is saved as an attachment. For your scenario you might have to specifically save the word as attachment to WO and when it is edited by user you also need to replace old version with new version (delete existing attachment and create new attachment with the content from word document).
Tracing the use case edit feature should help you for your requirement.