Good ol' Major Nelson has a public service announcement up regarding Microsoft's Windows Live ID and Gamertag dormancy/cancellation policies. The post reads like a problem off of the LSAT - lots of contingencies, and interrelated account policies that sound confusing. Here's the original text:

　　What happens:

　　 In the rare case that you DO NOT sign in to Xbox.com or another website that uses Windows LIVE ID (like Hotmail) it is possible that your Windows LIVE ID expires (goes dormant.) An Xbox LIVE Gamertag is unrecoverable from the system only when the associated Windows Live ID has become dormant and the Gamertag has been deleted from all Xbox 360 consoles.

　　Members with dormant Windows Live IDs can continue to enjoy the benefits of their Xbox LIVE Gamertags on their Xbox 360 consoles, including earning Achievements; however, they will not be able to use their expired Windows Live IDs for activities such as account management on Xbox.com.

　　It is important to note that an Xbox LIVE Gamertag is unrecoverable from the system only when the associated Windows Live ID has become dormant and the Gamertag has been deleted from all Xbox 360 consoles.

　　What you can do to prevent having any problems:

　　We recommend that people log into their Windows Live ID on Xbox.com or Xbox LIVE Marketplace on the Web at least once every four months.

　　What we're doing:

　　We are actively working on an update that will allow you to link your Gamertag to a new Windows Live ID if one becomes dormant.

　　Our translation - Your Xbox Live Gamertag is safe unless you delete it from your console. Don't worry about logging in every month or so to keep it active. Nothing will happen to it. The Windows Live ID, on the other hand, suffers from the Hotmail affliction. Use it or lose it. Log in at least once every four months to keep Microsoft happy. In the case that you've tied your Windows Live ID to your Gamertag and let the Windows Live ID go dormant, you won't be able to do any online account management or tie your Gamertag to a new Windows Live ID. Microsoft is addressing that last bit as we speak. That should be it, unless we missed a point in there. Carry on.