Does our paypal account need to be this for the lightbox to work?
PayPal Payments Advanced - This option allows customers to pay by credit card or with their PayPal account, without ever leaving your site. Payment is handled through a form on PayPal's site which is embedded on your checkout page. This means your site never 'touches' the credit card information, which is great for PCI compliance.
I'm not sure. It sounds like you don't have anonymous checkout enabled, don't have "PayPal Account Optional" set on your paypal account (see here: https://www.paypal-community.com/t5/About-Business-Archive/How-to-Enable-Guest-Checkout/td-p/607988), or don't have PayPal Express anonymous checkout settings enabled.
Do you have the PayPal.Express.AllowAnonCheckout and AllowCustomerDuplicateEMailAddresses AppConfig's enabled?
As described here: http://manual.aspdotnetstorefront.com/p-1683-paypal-express-checkout-9400.aspx