Wanting to update to latest software version but fear that it will remove the current XBMC install and all of my plugins, etc. Does an update wipe everything clean?
Yes - redoing the jailbreak wipes everything.
If you have ATV Flash installed then you can use the backups feature in the Maintenance app to backup settings, and restore them again later after redoing the jailbreak. However you still have to restore all apps after redoing the jailbreak - they are not saved by the backup feature.