NPCs are exempted, though you might want to avoid going too far with NPCs that have been used by other players. For NPCs created by other users, you can get away with interacting with them like PCs.
Yes, your PC will be retired permanently in the storyline if he dies, though you can still use him in non-story role-plays like in the dueling ring. The death of a player character is a natural part of the role-play, though they do not occur very often. Even for beginners, it is rare for a fresh PC to get killed.