Who sees the ads?
From this comment and this one my understanding is as follows - blue are LJ ads and red are Google ads.
|V i e w i n g|
|Basic/ EA||Plus||Any Paid/ Perm w/o AdSense||Own Paid/ Perm w/ AdSense||Other Paid/ Perm w/ AdSense|
|Paid/Perm w/o AdSense||X|
|Paid/Perm w/ AdSense on own journal|
|Paid/Perm w/ AdSense on own journal and choosing to view AdSense site-wide|
What's in it for me?
(Sorry, forgot this bit intially) It all depends on the way you use your journal and how your friends view your entries. The ads are inserted into the journal layout, not into the body of an entry, so any entry that is viewed on a friends page will show no ads. You need someone to come to your journal and view recent entries, or even a specific entry, in order for the ad to be displayed. One way to ensure this would be to put your content behind a cut to force readers to view your entry alone, and presumably in your journal style.
That makes this program ideally suited for artists, authors, craftmakers, and writers holding forth on a particular/popular subject. Anyone who has lots of readers and especially anyone who has lots of readers that only come to LJ for that particular blog is going to make out wonderfully from this program.
What's in it for LJ?
According to this comment the AdSense API that LJ is using does have an incentive program - for each user who signs up for AdSense through LJ, and then reaches a certain balance within 180 days of signup, LJ will receive a Referral Bonus of $5 or $250 dollars, with a onetime bonus of $2000 after 25 LJ users have reached the second level. Now, that's the standard agreement, it's possible that LJ has worked out another arrangement with Google.
Also, as pointed out in the comments to the news post, this is basically a way for LJ to stay competitive with Blogger and Wordpress by offering features that appeal to professional bloggers.
What's this about the AdSense account being canceled?
A mistake. While the FAQ (currently and incorrectly) states that "Please note that if you cancel your paid account on LiveJournal, your AdSense account will be automatically canceled" the truth is that upon cessation of paid time the journal will simply stop showing AdSense ads in place of LJ ads. When paid time is renewed the AdSense ads will return.