Hey there,
1) That's a rather complex issue, and the answer to which is - it depends. Since you've already admitted to using their likeness, then no. However, if you can alter the image in a way that any reasonable person would not draw the conclusion that Character x is Person x, than you are in the safe zone. (For example, a person's personality/attitude is not a protected right)
2) You do not necessarily need to pay royalties to said person, unless they stipulate that when/if you obtain consent from them.
3) You can claim copyright for your character art, however, when it comes to copyright issues and lawsuits it will need to be registered. Generally speaking, you have five years from the date of creation to register your work for it to be considered
prima facie. In other words, after this five year period and someone else uses your work without your permission - well you just made your suit difficult though not impossible to win.
For further reading, I recommend this
pdf.
Also, a simple solution to your problem without requiring the legal advice of a lawyer would be to have them sign a release. Many of these forms are available for free online, and legal zoom contains a
PDF teaching you how to create one.
Hope this helps!