You know what, I'd make it optional. On the options screen, you could select five options:
1: Anyone can die, and if a storyline crucial character bites it, its over. (hard mode)
2: Anyone can die, but the storyline will work around it (but it will lead to some seriously negative stuff in the storyline if you decimate your cast.) Lose your last character, and its over.
3: No one is permanently dead. Characters can be revived with items or will come back at the end of battle with one hit point. However, get wiped out and its over.
4: No-one is permanently dead, and death merely makes you go back to a save point (easy)
5: Anyone can die, and if anyone does die, its all over (hardest mode.)
Combine this with difficulty settings and you've got a chance for real immersion, as well as a challenge worthy of anyone proud to wear the title of hard-core.