Yes you will be adding a line of service to your current AT&T Billing Account. Not all plans are supported, check with A&T for the latest list of supported plans, (Currently 2017 Unlimited Data & Mobile Share Data plans work out of the box).
Yes, it is a $10 Unlimited Wearable plan (plus Fed, State, Local fees like 911 and taxes) that is assigned a unique phone number that is then paired with your existing iPhone phone number using AT&T's NumberShare feature to allow your watch to make calls from it's own phone number that will appear to come from your iPhone's number.
To receive calls on your watch, someone calls your iPhone phone number and the call is routed to your watch depending on the status of your iPhone.
If your iPhone is on but locked and your watch is within Bluetooth range then, Bluetooth is used to route your call from your iPhone to your watch. If Bluetooth is disabled your iPhone or you are out of range of Bluetooth, then your incoming calls are routed to your watch from your iPhone using Wi-Fi (if they are on the same network) or directly to your watch via Carrier Wi-Fi Calling if your watch is connected to a previously known Wi-Fi network and you have Cellular in "Standby" mode.
Finally if all else fails, the AT&T system will route your incomming calls directly to your watch using Cellular (LTE) or UTMS as a backup in the case of AT&T.
Note: UTMS fallback support varies by carrier.
Dave