From Diablo Wiki
Death in Diablo 3 is almost without penalty for Softcore characters. Players can resurrect at the last checkpoint or get a resurrection from another player, and in Diablo 3 version 2 and Reaper of Souls a "resurrect at corpse" option was added to enable players to pop back up right on the spot, after a five-second delay. Aside from the time delay the only death penalty is a 10% hit to item durability, which seldom amounts to more than a few thousand gold per death, even in quality end game gear. (This was not always the case, and shortly after Diablo 3's release repair costs were much higher.)
Hardcore mode is the exact opposite, and there death is permanent, with dead characters forever dead; rendered unplayable at the loss of all their equipped gear and the contents of their inventory. (Though the stash is account wide and anything left in it remains safe for other characters to access.)
When a character is very low on health, a reddish haze appears around the outside of the screen, providing an emergency visual indicator. The sound effects are tweaked also, with the sound of a heartbeat added to emphasize the danger of imminent death.
Death and Difficulty
Pre-release, the D3 Team talked about balancing D3's combat to make a more gradual struggle. The developers attempted to limit health recovery with a cooldown on healing potions, less life steal than in Diablo 2, five-second casting time for town portals, and less spiky damage from monsters
Their efforts were not very successful in Diablo 3 vanilla, and players soon found that Life Steal + high damage was enough to almost guarantee immortality. Spiky damage was also an issue, without much steady damage to worry about, and many players geared in glass cannon style. This resulted in most players winning 99% of encounters without feeling any danger, and suffering an instant one-shot death to the other 1%. (Which was exactly the situation of Diablo 2 that the D3 devs had hoped to avoid.
This scenario was greatly improved upon in D3v2/RoS, with a total rebalance of the game's combat. Spiky damage from monsters was much reduced, life steal was reduced at 60 and removed at lvl 70, and much more premium was put on damage mitigation and gradual methods of healing (such as regen and Life per Hit). This resulted in a more tactical game play, with less squishy characters allowing for a wider variety of player builds and play styles.
While the issue of death penalties was long-debated pre-game (see section below) the developers paid much less attention to Life Bonuses. These do not refer to the actual in-game bonuses granted for surviving after dropping below 5% or 10% hit points, but to game incentives granted to players who stay alive, and which are lost when they die.
Not suffering humiliation, delay, or repair expenses is one sort of Life Bonus, but the first actual game bonus feature came in the form of Pools of Reflection, which were added in D3v2 and are also seen in Reaper of Souls. These pools grant a +25% experience buff and can stack duration up to 10 times. They are lost when a character dies, and while this is some incentive to not die, many softcore players care little for them, since increasing the game difficulty another notch or two grants a far larger exp bonus, no matter how many times they die, than Pools of Reflection.
Pools work exactly the same in Hardcore, but there they provide all higher level characters what is essentially a permanent +25% experience buff.
Several skills and passives offer characters ways to avoid otherwise certain death. These trigger some defensive property when a character drops below a minimum threshold of hit points, or actually bring a dead character back to life, though there are always lengthy cooldowns to prevent this from being used repeatedly.
- Monk: Near Death Experience
- When receiving fatal damage, you are instead restored to 35% of maximum Life and 35% Spirit. This effect cannot occur twice in succession within 60 seconds.
- Wizard: Unstable Anomaly
- When you receive fatal damage, you heal to 45% of your maximum Life and release a shockwave that knocks enemies back and slows them by 60% for 3 seconds. This effect cannot occur twice in succession within 60 seconds.
- Witch Doctor: Spirit Vessel
- Reduces the cooldown of your Horrify, Spirit Walk, and Soul Harvest spells by 2 seconds. In addition, the next time you receive fatal damage, you automatically enter the spirit realm for 2 seconds and heal to 15% of your maximum Life. This effect cannot occur twice in succession within 90 seconds.
During Diablo 3's construction, the developers defended the lack of death penalties from players who worried that such a lack of penalty would encourage a very reckless, "all-DPS" style of play. As it turned out, the worried players were correct. Early Diablo 3 was very seldom in the desired goldilocks equilibrium. Most combat scenarios were very easy, and when things turned hard they tended to be instantly fatal, with very little in between.
Addressing this issue required many patches to smooth out the spikes in difficulty, a struggle that the developers made little progress in until the massive revisions of Diablo 3 version 2, nearly two years after the game's release.
Here follows a chronological collection of developer comments on their approach to death penalties and how that idea evolved during development.
Jay Wilson in August 2009.
Generally we kind of rely on the effect that players do not want to die. You know, you just do not want to. So there is no real reason to add a further "ding" to them for something happening that was already unfavorable to them. But we have not got our final mechanics on that, yet.
Players asked about a gold penalty for death, and Bashiok commented on it in October 2010:
Making sure someone can’t endlessly throw themselves against monsters/die/repeat and eventually win is something we’d want to stop. To make the player take pause and realize they’re not going to get past them unless they straighten up and pay attention and play better, or take some extra measures to buff up, or simply come up with a different strategy, those are the types of death penalties that work. Those are the ones we like and that I’m talking about.Taking gold away from people, or taking a full level of experience away, yeah, that’s a wake up call. It’s also the quickest way to get someone to uninstall the game. A very select few people will put up with something like that. It’s fine in Diablo II because gold has almost no use, but imagine if it did. You’d be encouraged through the mechanic to grind in easier areas where you’re sure you couldn’t die just so you could earn gold safely. That sounds terrible. Without a gold penalty you can play the content you want to play and meanwhile you’re finding items and amounts of gold that are relevant. That sounds like fun.
Their sentiments were admirable, but it proved entirely inaccurate in terms of how Diablo 3 vanilla developed. The game incentivized reckless, high risk/high reward play, and most players, at least in Softcore, found it wise to put most of their resources into offense. At least that was the way until Inferno or higher difficulty levels, when monster damage grew so high that players were constantly being one-shot killed, and that was frustrating in of itself, no death penalties or not.
This situation did not change appreciably until the major revision to the combat system in Diablo 3 version 2 in February 2014.
Death in the PvP
Death in PvP was a different issue, since there players are expected to die, and repeatedly if it's a death match style of combat. Thus penalties are not a useful feature or deterrent, since players are trying their hardest not to die already, as that's the whole point in dueling.
There were no death penalties for losing in the death match seen at Blizzcon demos in 2009 and 2010. The Arena did not make it into Diablo 3, but when brawling was added in late 2012 there were no penalties for dying in that form of PvP.
Hardcore Arena Death
There was something of a debate over death penalties for Hardcore players in PvP, and it is covered extensively in the Hardcore article. Suffice to say here that the majority of Hardcore players argued that there would essentially be no hardcore dueling if the only option was permanent death, and the developers ultimately came to agree with that view. Thus when PvP came to Diablo 3, if only in the brawling form, the rules were the same for Hardcore and normal characters; fight all you want, die all you want, without any lasting penalties.
Special Monster Death Animations
Diablo III has custom death animations for every type of monster in the game. One size does not fit all either, as monsters often die in different ways according to the type of damage that finishes them off. Monsters killed by poison emit greenish smoke, Arcane victims glow purple on the ground, Lightning killed monsters are blackened husks like Aunt Beru and Uncle Owen, etc.
Monsters that die to Critical Hits put on a special display and can be seen exploding into chunks, shattering into ice cubes, de-skinning themselves, etc, with the appropriate type of elemental effect usually added to the carnage. These special animations do not usually include bosses, who tend to have elaborate death animations that show more of their inherent nature than the type of damage that killed them.
Player FatalitiesSiegebreaker inflicted a special decapitation kill to a Barbarian, and the developers said that Fatalities would be included in the game for some of the special bosses.
Bashiok: That's what we would like to do. We'd like it that when a player dies to a boss we may have a special/random event or death animation specific to that boss. So if you're going to die or have died to a boss, there's a random chance that you'll see something other than a normal death. That's the dream any way.
Sadly, this feature did not make it into the actual game, as revealed in January 2012. 
All things considered there are just higher priority tasks sometimes. We’d love, for example, to have the monk display his weapons during all of his skill animations. But it’s an enormous animation and effects investment to get it done, and we have to weigh all of these things against other features and polish. A lot of the skills we could improve have multiple animation sets, multiplied twice for each gender, and then multiplied by each weapon type he can equip. That can be 40 or more unique animations, and then there’s a full FX pass, approvals, QA testing, etc. etc. and that’d just be for 1 skill.We have our wish lists, but it’s a balancing act of resources. Ideally our choices when balancing go toward setting realistic limitations, and producing the best game possible.
- Bashiok forum post - August 2008
- Bashiok forum post - September 2008
- Jay Wilson Interview - August 2009
- Bashiok forum post - B.net forums, October 25, 2010
- Bashiok forum post - Battl.net forums, October 5, 2010
- Bashiok forum post - August 2009