It would appear that you are editing the wrong field. Either that or looking at the looked up date field and mistaking it for the data in the look up table.
The method you describe sounds like you have correctly set up a look up. (This is one of two methods that you can use), but the "allow creation..." options have nothing to do with this function. Whether you specify them or not has no effect on how a data look up works.
You'll need to take a closer look at the layout where it appears that this is happening.
The layout should be based on "Medical Letters" so Layout Setup | Show Records From for this layout should show that name. If you enter layout mode and select the text field on your layout that is supposed to show the looked up data copy of this text from the template table, it should show Medical Letters:: as the first part of its name in the Display Data From box on the Inspectors Data tab.
Well, I have to admit, it may be from the various connections and disconnections I made in the same database that messed it up. In the end, I only need a few templates, and I decided just to use scripts to add the text I wanted. (I wanted to also be able to freehand entry in the same field if it was a letter that didn't use a template, and with lookup fields, I couldn't do that when they were empty).
Which is simply one more indication that you did not have your layout set up to refer to the correct field or you would have been able to enter text directly into that field even if you had not looked up text from a template. Sounds like your field on the layout referenced the wrong field.
A table based system of layouts, BTW, make it much simpler to make changes to them in the future as this then becomes a data entry process that does not require a FileMaker Developer as is the case when you rely on a script to enter this data into the field.