How do use upload function for mail merge with Word
There's two different things:


Mail Merge, which is a native feature of word.
Print/Merge document, with output as a word document, which is a feature of CiviCRM. (I'm not sure it has the ability to "upload" a word document. If it does I'm not familiar with it, but see below.)


For the first one, you would want to do a contact export in csv format, and then from within MS Word do your mail merge as you would with any excel data source.

For the second one, inside CiviCRM:


Go to Administer - CiviMail - Message Templates and create a new template.
In the HTML section, copy/paste from MS Word into the box using the Paste-From-Word icon.
Then you will need to replace your tokens with the civicrm versions of the tokens, using the dropdown.

Then when you do a contact search you can choose Print/Merge document from the actions dropdown on the search results page and choose your template and MS Word as the output format.