Yes, thermal compound is necessary. Attempting to touch two pieces of bare metal together leaves a lot of microscopic air gaps which reduces the heat transfer potential from the CPU to the heat sink. Thermal compound improves it significantly. Think hot water vs hot air. You can stick your hand in front of a space heater that is putting out 130F air but you can't put your hand in 130F water without getting burned.
No, you don't have to replace the thermal compound very often. I would suggest replacing it every two years, but only if you're noticing high temperatures. The effectiveness shouldn't degrade much just because the thermal paste is old.