Every homebrewer dreads getting an Acetobacter infection (the bacteria that makes vinegar). I've gotten it once. Fortunately it was a 1-gallon experiment, so I only ended up with 1 gallon of malt vinegar. I had saccharomyces and brettanomyces yeasts in there also, but there was no competition on who won that fight.
Fresh, roasted, or dried chilis will each impart a slightly different flavor. Personally, I'm not a fan of chilis in a light beer but I've had a couple dark beers that were good and the roasted chilis played well.
Sliced at flameout would work fine, especially if you are concerned about infection. I'm sure that is the way most commercial breweries handle it. Roasting them or dunking in StarSan takes care of infection as well.
BTW, worst beer ever was a cheap mexican lager with a whole jalapeno in the bottle. I have no idea how they got it in there, as it was too big to come out.