Bahaha, never! =P
That is a really good question, and one I don't feel equipped to answer. *laughs* I do think the possibility of dying is both good and bad. Good because it shows the seriousness of the story, raises the stakes, and keeps us on our toes. But at the same time, you do run that risk of somebody getting killed off before things have really begun. I'm not quite sure how to go about balancing this. Discussing potential death scenes beforehand OOC is one possibility, but that runs the risk of spoiling the suspense. That's definitely a tough decision. I'd like to hear others thoughts on this too. :)
As for rewards, I kind of like what
@MotherOfCthulhu said. Each of our characters have specific goals in mind, so accomplishing those would be a reward in and of itself. Maybe the characters (assuming they survive) would receive special items from the fulfillment of these personal goals too? Take "slaying a dragon" for instance. If successful, the dragon could have been guarding something, like a weapon, or it could have something rare on it that's worth a certain amount of coin (or whatever the currency in Ajora is) or that can be forged into a weapon or armor in one of the countries they visit. Since everyone has a different goal, achieving these would give everyone their own unique item. And in cases where they all have to work together to defeat some crazy evil thing that's not on anyone's goal list (such as Ifrit), there could be a reward that they all receive for killing it. You mentioned the possibility of the characters getting some sort of very limited magical abilities, so if you decided to still do that, those could be a reward too. Just throwing stuff out there and seeing what sticks. XD