Learn Dutch: Wij varen voorbij het eiland.

Yes! Just like you can use words like binnen to show direction, spatial words like voorbij can act as postpositions. You could say Wij varen het eiland voorbij to really emphasize the active movement of crossing past it. Both word orders mean the same thing, but putting the spatial word after the noun sounds a bit more dynamic.

Why use varen instead of zeilen for "to sail"?

In Dutch, varen is the general verb for traveling on water, regardless of the type of boat. You would use it for a motorboat, a canoe, or a ferry. You only use zeilen when the boat is specifically powered by wind using actual sails. English often uses "sailing" loosely for any boat trip, but Dutch keeps them separate.

Does voorbij only apply to physical space?

While it means "past" in a physical sense in this sentence, voorbij is also very common in expressions about time. For example, if a difficult period or an event is finally finished, you can say Het is voorbij (It is past/over).