A recent survey showed me how much of a free-loader I really am. I've provided Turbine nearly $1500 in the last 5 years!
When reincarnating, the +1 is applied at lvl3 and the +2 is applied at lvl7 during the re-level-up process.
Back to your original problem.. Your process should be something like this:
1) buy Heart (Is there one in your character's inventory?)
2) talk to the orc shaman in House J (be sure to read what he says and select the right 'i want to reincarnate now' option)
3) log out --- at this point, you should see a "Reincarnate Now" option on your Character selection screen
-- edit - do not log out until you see this text:
4) log into the character by clicking the 'Reincarnate ' side button (not the 'Enter' button at the bottom of the screen!)
-- at this point, as previously pointed out, you should be on a ship. If not, then verify that your Heart has been consumed. If it has not (should be in your inventory in this case), then go talk to the orc again and pay attention to what he says.
-- if you're on the boat, level up by talking to the female NPC. Again, as mentioned previously, this is just like leveling up else-wise and, as such, should be undertaken with a modicum of planning and reading.