As an alternative to 'death' with all the skills and experience loss, perhaps certain creatures or whole areas could result in the capture of the character when otherwise they would be killed. For example, town guards might throw the victim in the cells, only to be released on payment (i.e. purchase) of a pardon from the jailer or judge. Bandits might sell a character their 'freedom' (to be invoked) or a guard could be bribed to let them out.
Imagine being captured and losing all your equipment! This would hardly be a soft option compared to death as it stands now. Possibly storing the gear in another room, so you'd have a chance of getting it back - perhaps not all of it, as they sell off choice pieces. Or the kit could be distributed amongst the bandits, so you have to slay them to recover your stuff. I think it would give great chances for more interaction between characters as you ask the paladins to come and rescue you from your captors, or pay a thief to come and pick the lock to let you out.