When it comes to categories, the place name that existed when the ancestor existed should be used, even - and especially - when the place no longer exists. This is important historically, but also to avoid confusion when someone attempts to duplicate or verify the research for themselves. I can give you an example:
Several of my ancestors lived in a place called "Westville," so named because one of them was the postmaster and had donated the land for the post office. Westville no longer exists, there are not even any buildings from that time remaining. It does still show up occasionally on maps, even though nothing is there. It's important (to me at least) to show the people who once made up this small farming community. I would use the category "Westville". The Westville category would explain, briefly, that it no longer exists and that it is now in Anderson Creek Township. Westville would be a subcategory of Anderson Creek Township, which would be a subcategory of Harnett County, which would be a sub category of North Carolina and so on.
I might even create a Free Space profile for Westville with a great old photograph or two and some historical information and add that article to the category. It becomes, over time, a meaningful thing - which is part of what we are all trying to accomplish I think.