Yes, when you install a new version of the product, all files will be overwritten by the default versions.
The best way to proceed would be as follows:
- Install the new version on a test server and setup the out-of-the-box version of the plugin in question.
- Perform a test to see if the functionality of this plugin has been changed in the new version. (If an enhancement was submitted, it's possible that your desired changes have been rolled into the new version.)
- If modifications are necessary, customization the new version of the plugin to suit your needs and proceed with the production rollout.