I normally uninstall the current template and install the new one, and install the plugin over the old one. Now you could use the ext. manager to update your template and plugins also. But most of the time you might run into a database error. So I go with whats works for me.
But you should backup your files before doing anything… I copy my template folder to my local computer before doing anything just in case something go wrong I can upload the folder again… This is what I did to upgrade the 1.0.1 template to 1.0.2…
Now I am trying to figure out how to add a new module position to this template without everything disappearing…