[Fulltiming]

Typically, illuminated switches need a third pole to activate the internal light. A standard, non-illuminated switch breaks the power leg of the 120 volt power source and reconnects it when turned on. To have an operational light, you have to also have the neutral leg of the power source going to the switch. While I am not sure that all manufacturers use the same numbering nomenclature, all least some that I have seen use 1 as the hot (or incoming power), 2 for the load and 3 for the neutral. Frequently, the wire that goes to the 3 pin is a double wire, one from the incoming power source neutral and the other going to, in this case, the water heater neutral.

You can use a VOM set to resistance to see if 1 and 2 go from an open circuit (very high resistance, typically pegging the meter) to a closed circuit (close to 0 resistance) when the switch is moved from OFF to ON and then with nothing attached to terminal 1, if there is a constant resistance between 2 and 3 regardless of the position of the switch. This would be consistent with the nomenclature in the previous paragraph.