Edit: Karkarov beat me, but anyway, like he said....
The game have to be exited (to main menu) in order for new portraits to show up. So that means you have to make the character twice like you say. It works, but takes some time, and the screenshots are very low-res, so they might look a little pixelated.... You can do this at every lvl up, just replace the image without changing the filename.
I don't think there is any CNPC's that use the portraits you can choose (There is a girl that looks just like Calisca, though)