The points will have continuity accross them whether they are open or closed BUT it should be zero ohms closed and a few ohms (4 to 8 ohms perhaps) when they are opened.
When you check the wires going to the kill switch which you say always show continuity, it will show continuity if the points are closed and again a few ohms if they are open. This is if you are checking this switch with all the wiring still connected. An ohm meter that can measure low ohms such as this is required. Most inexpensive analog meters are not capable as their lowest scale is kOhms and not Ohms. Most digital meters that I am aware of can indeed measure the difference between zero ohms (or whatever the meter reads when its leads ar connected to each other) and 4 to 6 ohms or so.
If you suspect the switch as your problem simply disconect it. Disconnected, it cannot kill your spark.
The device in your picture is a rectifier. The two input terminals marked IN with the lazy "S" is the AC input. The lazy "S" is a symbol used to denote alternating current (AC) which is what your magneto produces. It is hard for me to tell for certain in your picture but I believe the symbol near the OUT terminal is the "earth" or "ground" symbol. If so, it should appear to look sort of like an arrow with the arrow head being made of 3 or 4 consecutivley shorter lines. If this is the case, then I feel quite certain that the terminal marked OUT is the + DC terminal and the - DC terminal is the metal body of the device which is connected to the body of the bike via the bolt that attaches it.
My knowledged of the Tomos Targa 'specifically' is non-existent so everything I said above is subject to scrutiny. It is all under the assumption that the Targa has magneto ignition and not battery ignition.