You can definitely encrypt your LOS device and update it (manual or OTA) just fine. I have a Nexus 6 and have been doing it for months now, both with official builds and a custom build I was doing.
I have an encrypted S5 with LoS. I believe autoupdate just doesn't work on it with TWRP period, but it might be because of the encryption. Either way, I just download updates once a month and sideload them.