The first 2.0 release will render transparent surfaces, so if the camera is above the water you will be able to see underwater and if it is underwater you will be able to look up and see out of the water in some places.
The attenuation of light underwater (due to participating media) can be simulated pretty well using appropriate atmosphere settings, but this is not an ideal solution for two reasons: there is no way to prevent the underwater atmosphere from reaching above the surface of the water, and the default settings are not designed for underwater scenes. Nevertheless, it is already possible to render convincing underwater scenes.
Beyond version 2.0, I think we may develop a new volumetric object type for Terragen (similar to the cloud layer or planet atmosphere) which is specifically designed to render underwater volumetrics, i.e. it will be possible to contain the volumetric medium below a particular height so that it does not reach above the water, and it will come with presets for a few different types of underwater conditions. Behind the scenes it will work very similar to the planet atmosphere or cloud layer, but it will make it easier to render realistic underwater scenes that fit in with the rest of the scene.
Looking further into the future, I hope to get the the underwater volumetrics to respect the water levels defined by other water objects such as the Lake object, but that will take longer to develop.
Matt