The beta testers will be making the final call on this. But my opinion is that if they die, that's it.
I know it sounds spiffy and novel to have the game end when the channeler dies, but I think this will be fatal to the game. The biggest problem with the original Age of Wonders is the ease of which the game promptly ended. You would walk into a dungeon or take a wrong turn and be up to your nose in enemies, even if you were proceeding with relative caution. From the sounds of it, channelers are expected to be proactive when plunging dungeons or attacking opponents. If this is the case, they will have to succeed in pretty much every battle or the game will be over. I'm the kind of person that doesn't load his game when I lose a battle or unfortunate things happen, so I would be having to start a new game every other time I sent my channeler to a dungeon (and I don't a game should revolve around loading). On the same token, I don't want to have to send my channeler to a distant corner of the map to keep him safe while my opponents rake in masses of power with their own channelers.
I'm not averse to the idea of a channeler being mortal and killable, but I think there needs to be plenty of safe guards. Perhaps at the beginning of the game, channelers are as vulenerable as any hero unit but, as time goes on, the channeler can develop spells or abilities that allow them to participate in warfare directly but have robust contingency plans that would make the casual death of a channeler in a basic battle almost impossible. For instance, you could develop an incantation avatar spell that allows your channeler to create a single magical avatar of himself (albiet, weaker) who can participate in specific battles while he remains safely in his tower. What's more, if an incantation avatar is killed, it could inflict XP damange on the channeler. There could be virtually a dozen means by which a channeler could have recourse if things didn't go well and, if an opposing channeler is whilly enough, can penetrate those safeguards and defeat their opponent.
If a channeler can be struck down by a couple of lucky lightening bolts or misteps, 2/3rds of your opponents will be dead before you even meet them (not to mention, you will have loaded your game 100 times by the time you reach midgame). For any of you that played MoM on a harder difficulty level, recall how difficult it was to keep a hero alive throughout the entire game without either loading your game after every other dungeon or customizing your wizard with nothing but life magic to gain a ressurection spell.
Also, I think that even if a non-player channeler is killed, their empire should continue expanding with a mundane monarch, but without the awesome advantage of having a channeler. Otherwise, the player will always, with almost no exception, plunge straight toward the "head of the snake" in every conflict to the neglect of other strategies. That's not even considering the fact that the AI will almost certainly not play cautiously with his channeler and give players an abundance of "cheap shot" opportunities to bring him down. How dull will the game be if almost every war ends with 1 channeler vs channeler battle, winner takes all?
Frog, I implore you to reconsider.