Instead of adding a death penalty which, BTW is also a good alternative, how about adding a good play reward system? You get bonuses for not dying, finish the mission in a certain amount of time, etc, etc. You could add a sliding bar for difficulty and as its increased the reward for "good" play would increase. Just an alternative idea for all those people out there hat don't want any type of death penalty. BTW this system would work great with a DEATH penalty!!
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In PvE it should reset you to your last checkpoint, meaning the enemies past that checkpoint respawn.