Another idea was brought up that I should have included in the OP:
- normally, avatar death = player loses
- however, the player can eventually research a high level item creation spell that allows them to create one (and only one) very special and powerful item; one of its powers would be to "revive" the avatar once. The creation of this item would consume a lot of "essence", and the "revive" would cost a lot more. So it would only be available to reasonably powerful players, it would have to be done before hand, and it would really hurt.
I think this idea has more "cool factor" than my straight up essence-for-revive idea in that it could allow some really nice items for those willing to make the tradeoff.
Of course, you then get into the issue of what happens if someone manages to separate you from your ring, er, really-cool-item, or what happens if it is destroyed. The game wouldn't really have to model that though.