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I believe your engine is a NON-interference engine (but you may want to check to be sure). So if the belt breaks, your engine will simply stop running, and won't be damaged.
(Of course, having your engine suddenly stop running can put you in a dangerous situation if you are in traffic, etc.).
You don't need to replace the water pump when you do the belt, but it isn't an expensive part, and it is right there when you do the belt. So most do it because it is basically little or no extra labor cost. If you don't do it, and the water pump goes out next year, it's a decent amount of labor to replace it (several hundred $$). If you are really tight on money, tho, you could skip the water pump and hope for the best. It will probably last several more years.
$700 seems about right. It's a decent amount of labor.
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