I have replaced the motor and transmission mounts on my 88 XJ. Like you I was able to see daylight between the top of the rubber and the metal banjo housing. On the driver's side I could slide my index finger between the rubber and hte housing.
The replacement mounts will have rubber filling the whole area inside the metal. If it has drawn back then it is partially degraded. If there is day light then the rubber can move and cause the engine to roll a few degrees, you will feel this when you rev the motor.
I installed new mounts which I purchased at the dealer. I do drive my XJ on 6-10 hour drives at times and isolation of vibrations out of the passenger cabin is VERY important to me. I am willing to replace mounts over having vibrations wear on me.
Everyone will have an option on what material, to me vibration isolation is #1, long life is more important to others. You have to make up your own mind. I choose dealer mounts because I knew they had the objective of making the XJ a pleasant vehicle to ride in.
My dealer told me they replace all 3 mounts at one time if one if found bad. If you don't the remaining older ones will fail more quickly.
To change the mounts you will need to do one side of the engine at a time. I recommend you jack up the XJ, take off the front wheels and let the axle drop down. Support the chassis on jack stands, do not put jack stands under the axle.
Then you will have to jack the engine, put the jack under the bellhousing, no the oil pan, and jack up the engine to take the load off the mount. Then remove and replace the bad mount. do the same on the other side. On my 88 XJ I had to remove the oil filter mount so you may want to pick up a set of O rings at the dealer.
If you don't take off the wheels and support the chassis then when you jack up the engine with the weight on the wheels, the entire chassis will lift until you are at the end of the suspension travel THEN you will begin to lift the engine. I did not want to use a 6 ft step ladder to change mounts.
To do the transmisson mount you have to drop the crossmember to change it out. I used a jack under the transmisison pan. I had a 2 x 10 between the jack and the pan. I lifted up the aft end of the transmission once the bolts and nuts were removed. Not a bad job. All of this goes better if you have use of a lift.
I did try to buy mounts at a part store, they were anchor brand and the rubber was already shrinking. I went to the dealer and their mounts looked very good, rubber filling the cavity and the look of quality.
Some day I'll have to change mounts again, but not anytime soon.
Raise and lower it slowly.