Your approach sounds very good - but I can think of a possible way to improve it.
To reduce the impact of data loss since the last backup, and EBS volume failure (unlikely, but still possible) you could store your data on a separate EBS volume than your system files, and back up the data volume more frequently than the system volume.
With your current strategy, you'll lose any data that was created between the time of the last backup and the time your instance failed. With the new approach, the data volume will be getting written to right up until the instance failure, so you can just reattach it to your new instance once it's up and running.
An AMI, as you note, is a machine image. It's a total snapshot of a system stored as an image that can be launched as an instance. We'll get back to AMIs in a second.
Lets look at EBS. Your other two items are sub-items of this. EBS is a virtual block device. You can think of it as a hard drive, although it's really a bunch of software magic to link into another kind of storage device but make it look like a hard drive to an instance.
EBS is just the name for the whole service. Inside of EBS you have what are called volumes. These are the "unit" amazon is selling you. You create a volume and they allocate you X number of gigabytes and you use it like a hard drive that you can plug into any of your running computers (instances). Volumes can either be created blank or from a snapshot copy of previous volume, which brings us to the next topic.
Snapshots are ... well ... snapshots of volumes: an exact capture of what a volume looked like at a particular moment in time, including all its data. You could have a volume, attach it to your instance, fill it up with stuff, then snapshot it, but keep using it. The volume contents would keep changing as you used it as a file system but the snapshot would be frozen in time. You could create a new volume using this snapshot as a base. The new volume would look exactly like your first disk did when you took the snapshot. You could start using the new volume in place of the old one to roll-back your data, or maybe attach the same data set to a second machine. You can keep taking snapshots of volumes at any point in time. It's like a freeze-frame instance backup that can then easy be made into a new live disk (volume) whenever you need it.
So volumes can be based on new blank space or on a snapshot. Got that? Volumes can be attached and detached from any instances, but only connected to one instance at a time, just like the physical disk that they are a virtual abstraction of.
Now back to AMIs. These are tricky because there are two types. One creates an ephemeral instances where the root files system looks like a drive to the computer but actually sits in memory somewhere and vaporizes the minute it stops being used. The other kind is called an EBS backed instance. This means that when your instances loads up, it loads its root file system onto a new EBS volume, basically layering the EC2 virtual machine technology on top of their EBS technology. A regular EBS volume is something that sits next to EC2 and can be attached, but an EBS backed instance also IS a volume itself.
A regular AMI is just a big chunk of data that gets loaded up as a machine. An EBS backed AMI will get loaded up onto an EBS volume, so you can shut it down and it will start back up from where you left off just like a real disk would.
Now put it all together. If an instance is EBS backed, you can also snapshot it. Basically this does exactly what a regular snapshot would ... a freeze frame of the root disk of your computer at a moment in time. In practice, it does two things different. One is it shuts down your instance so that you get a copy of the disk as it would look to an OFF computer, not an ON one. This makes it easier to boot up :) So when you snapshot an instance, it shuts it down, takes the disk picture, then starts up again. Secondly, it saves that images as an AMI instead of as a regular disk snapshot. Basically it's a bootable snapshot of a volume.
Best Answer
EBS volumes are persisted when your instance fails:
"Amazon EBS volumes are off-instance storage that persists independently from the life of an instance." see EBS Information
"Local instance storage" is probably what you're thinking of - and that is lost when the ec2 instance is terminated. I use local instance storage to handle data that can be rebuilt from elsewhere. It can be very handy as a fast cache of data - but you must be able to rebuild it.
Q1: Either use Amazon's RDS service to backup your database regularly and automatically, or run mysqldump on a cron job, compress + encrypt your backup file, and perhaps push it to S3.
Q2: You can snapshot an EBS volume, then create a new volume from the snapshot and specify the storage space (effectively expanding it).
Q3: Snapshots allow you to roll back to a point in time - so before you do potentially breaking upgrades, you could snapshot to ensure you've got a rollback plan. You can snapshot as frequently as your data/service demands.