I didn't see your question about the FM transmitter until after I answered your primary question. I personally don't like FM transmitters, especially if you do a lot of driving. If you do get one, make sure it has a lot of frequencies as options, and is easy to change on the fly. I have my iPod "docked" in my car with a y-connector (mini-plug to r/l stereo) that you were talking about with the stereo. In my 2004 Honda Pilot, since I'm not using a CD changer, I got an adapter from Blitzsafe that attaches to the head unit CD changer connector and has r/l female inputs, to which I attached the y-connector, and ran everything down the back of my dash, coming out in the console area between the front seats. Works like a charm with the kid's DVD player, too, or anything with a headphone plug. Experience has taught me to use a LOT of electrical tape to the r/l stereo plugs, since there's a lot more jarring than with your typical home stereo, and it's a pain to get behind the head unit to fix it. I know Blitzsafe makes the adapters for a lot of different makes/models.
If that isn't an option, I actually prefer using a cassette tape adapter with the mini-plug. But I know a lot of cars don't even come with the tape players anymore, either.
So, your last option is the FM Transmitter. Get on Amazon and search "FM transmitters" and go with the reviews/ratings from there to get a decent one.
Two things are infinite: the universe and human stupidity. And I'm not sure about the universe. -- Albert Einstein