If you just want a phone, you do not need an iphone.
If you want an all singing, all dancing piece of cool tech then the iphone will fit the bill.
The iphone is great for texting and emailing and on the move internet use. Your contract will dictate how much of it is free. The on screen keyboard is sufficient for most people for this but can be fiddly, especially if you are in a hurry.
As a phone it is a little large to hold to the ear for some. However, its benefits far outway this detail.
Fantastic for downloadable applications. Some free, some not. Some useful applications, some games, some silly applications.
The iphone is good as a temporary mobile office and for games.
The 16 gb is currently sufficient (I expect) for most people. However, as time goes on, more and more apps will appear and if you download video this will eat into it.
Like most things technological, get the best you can afford in terms of future proofing. However, if like most people you change your phone on a regular basis when the compulsory contract term expires then this may not be necessary. Who knows what will come out in the next 12 months that might supercede this great phone.
The biggest difference between the iphone and the new iphone 3gs is the fact that the new version has video recording capability. If you do not need this, then the older (but still very good) iphone might be of better financial value to you.