"Automatically update document styles" is required if you want Word to update the styles in a document after you have attached a (new) template to the document. However, once you have done that, you should clear the option again. Otherwise, Word will continue to update styles the next time you open that same document, and you may not want that to happen.

The "Update automatically" option for individual paragraph styles is different. It can be used to incorporate direct formatting into a style.

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Stefan Blom
Microsoft Word MVP

Microsoft 365 apps for business
Windows 11 Professional