sounds like you have a cracked head or a leaky or blown head gasket and your getting water in your oil. is the exhaust smoke white? this is a tell tale sign of water in the oil. drain the oil and put it in a clear container and see if there is any water oil separation. if there is, put in fresh oil and try torquing down on the head bolts. check for visible leaks around the head. find out why it's running hot. this can cause leaks and cracks in the head and gaskets. you may need to put in new gaskets or a top end rebuild. good luck.
If it's the lower unit oil expect it to be shaft seal leak. Have a pro give you a quote to repair complete with Volvo part numbers and ESTIMATED DELIVERY TIME for parts. With part numbers you can try to source them elsewhere and compare pricing. You might need some 'special tools' to DIY. Don't let this go as it will lead to bigger problems.
I recently fouled the prop with a rope and must have done some seal damage at the same time as my saildrive oil is now milky..... looks like ill need to haul her out and get the seals changed.....
Its a 30yr old sail drive (from a single cylinder 8hb Bukh diesel), and im not sure how much maintenance its had in the past..... Is there anything else I should do or check while shes out of the water ??