I haven't looked at my '88, but on my '85 there are two horizontal coils and I am almost positive that the lower coil is for ignition and the upper one is for the lights.
If the flywheel is off, don't hesitate to take off the backing plate with the coils on it. There is a timing mark and as long as you put that back right, you'll be OK. With the coils off, you can see what color wire is attached to which coil and then look at the wires under the tank (or in a manual) for what color is lighting and which is ignition. I'd give the coil a try anyway. You say the wire is nicked half way through, but I say you still have half the wire there. Good luck.