It really comes down to a personal choices.
You can just have lots of character models using a single skeletal mesh, you can just do the editing in the modeling program and export them.
The benefit as you say for a modular system is that you can just change the shirt, pants, or any other items and just mix them together at runtime, with a lot of options this will likely save you time in the long run.
The real benefit for this design I think is if you plan to have a character creation screen as in most RPGs.
Here’s a link from UDN regarding developing modular characters for UE3 as well, might be a good read if you haven’t seen it already.
Edit: Actually I don’t think that was the article I read before, I’m sure I saw a more in depth article somewhere ages ago but I can’t find it now. You could look at the UE3 assets to see how they are made. Also games like Fallout and Skyrim use this system and you can get the assets as they allow modding.