Having it not fit the play-style you envisioned is certainly a valid argument. It might not be one I agree with, but you're the author afterall.
But I'm not entirely certain that "very few" players would use that feature. What percentage of players actually using it at some point would make it worth implementing? Wouldn't it be a fairly isolated change to make? It has the advantage (if it's an option) of open up the play style to fit what more people are interested in.
One way or another, I certainly wouldn't want perma-death for every lost fight. Afterall, I do really like the concept of being left for dead, but recovering (it's a very heroic concept), but it just seems like there should be a greater penalty for losing. I like the idea of a chance for perma-death, but other interesting things could be a chance for a permanent (or long term) injury (reducing stats or skills or just experience). Or if nothing else, losing a greater portion of your carried goods and gold.
It's started bothering me that I can lose a fight with 30000 gold, and yet for some reason, the victors only carry off a few thousand of my gold. Items I can understand (perhaps their inventories were full), but gold? Maybe you should lose all of you gold... although to balance this, you'd probably have to implement "banks" in towns where gold and items could be stored for a fee. This would give a safe place to protect stuff.
Well, regardless, all of these suggestions may be trumped by your argument about "over-cautious play style", but it's certainly worth consideration. I know it wouldn't affect my play style much.
Hmm... another consideration might be the fact that this helps add difficulty and challenge to a game that (for a number of people) might get a little too easy after playing for a while...