Algebraists employ formal (vs. functional) polynomials because this yields the greatest generality. Once one proves an identity in a polynomial ring $\rm\ R[x,y,z]\ $ then it will remain true for all specializations of $\rm\,x,y,z\,$ in any ring where the coefficients can be commutatively interpreted, i.e. any ring containing a central image of $\rm\,R,\,$ i.e. any $\rm\,R$-algebra. Thus we can prove once-and-for-all important identities such as the Binomial Theorem, Cramer's rule, Vieta's formula, etc. and later specialize the indeterminates as need be for applications in specific rings. This allows us to interpret such polynomial identities in the most universal ring-theoretic manner - in greatest generality.
For example, when we are solving recurrences over a finite field $\rm\,\mathbb F = \mathbb F_p\,$ it is helpful to employ "operator algebra", working with characteristic polynomials over $\rm\,\mathbb F,\,$ i.e. elements of the ring $\rm\,\mathbb F_p[S]\,$ where $\rm\,S\,$ is the shift operator $\rm\ S\ f(n)\, =\, f(n+1).\,$ These are not polynomial functions on $\rm\,\mathbb F_p,\,$ e.g. generally $\rm\ S^p \ne S\ $ since generally $\rm\ f(n+p) \ne f(n+1).\,$ But any polynomial identity of $\rm\,\mathbb F[x]\,$ specializes to this operator algebra by way of the evaluation map $\rm\,x\mapsto \,S,\,$ e.g. we can specialize universal polynomial factorization identities in order to factor the characteristic polynomial, e.g. difference of squares $\rm\ x^2\! - y^2 = (x\!-\!y)\ (x\!+\!y)\,$ $\,\Rightarrow\,$ $\rm\,S^2\!-\! c^2 = (S\!-\!c)\ (S\!+\! c)\ $ via $\rm\,x,y\mapsto S,c,\:$ and we can specialize cyclotomic polynomial factorizations, etc. This would not be possible if we instead employed the the much less general ring of polynomial functions over $\rm\,\mathbb F,\,$ since its specializations of $\rm\,x\,$ must satisfy $\rm\, x^p = x.\,$ Similarly we can factor differential operators (with constant coefficients, for commutativity)
A simple yet striking example of the power of polynomial universality is this slick folklore proof of Sylvester's determinant identity. It employs "generic" matrices (i.e. having indeterminate entries) and exploits to the hilt the fact that the determinant has polynomial form. Hence to prove $\rm\ det\ (I+AB)=det\ (I+BA)\ $ the proof proceeds by simply cancelling $\rm\ det\ A\ $ from the $\rm\ det\ $ of $\rm\ (1+AB)A = A(1+B A).\, $ Because $\rm\,det\,A\,$ is a nonzero polynomial in the domain $\rm\,\mathbb Z[a_{\large\, ij},b_{\large\, ij}],\, $ it is cancellable. By cancelling it universally, i.e. as formal polynomial in a domain (vs. later as a number, possibly $0$, after evaluating the indeterminate matrix entries) we eliminate the "apparent singularity" when $\rm\ det\ A = 0.\,$ See also the discussion here, and see also here on why the Heaviside cover-up method does not divide by $0$ when computing partical fraction expansion.
Many folks have problems understanding why this proof does not divide by zero. The problem seems to stem from an apparent difficulty forgetting the analytic view of a determinant as a polynomial function, so one may instead view it more generally as formal polynomial in the entries of the matrix. It seems that the analytic bias is so strong that it is difficult for some folks to shift to the formal algebraic viewpoint. I was shocked to observe that even some folks who have completed graduate algebra courses had great difficulty believing the validity of such a formal algebraic proof, thinking instead that one has to resort to alternative arguments employing topological notions (density). Analogously, one can find (older) published papers by distinguished mathematicians disputing the validity of proofs using formal power series (G. C. Rota often joked about such).
To master abstract algebra it is crucial to develop a powerful sense of abstraction. This permits one to exploit many powerful analogies, e.g. viewing "functions" as "numbers" or vice versa. Indeed, the interplay between number fields and function fields is the source of many fruitful ideas in algebra and number theory.