I've been playing since EA and know it was added as a compromise, but for a long time it didn't work the way it was supposed to. Originally you were supposed to have the option to exempt certain encounters from absolute choices (killing), for example the Tieflings that trapped Lae'zel in the cage. Unfortunately, this example is a one-time encounter and you will not encounter these Tieflings again. So these NPCs are always perma-dead if killed or knocked out.
Larian's compromise was to modify the original suggestion. This means that certain encounters (usually recurring NPCs) can be repeated - you have to pay attention to the “WORDING” here. If it says something like “Knocked out until the next long rest”, then the NPCs come back, if not, then it counts as perma death.
A positive example is Aradin and his gang. If you annoy Barth by not giving him back his locket or choosing similar dialogue answers, then they become aggro and if you knock them out, then you can have the dialogue again later to choose a different answer. That's a good thing - you have an additional little skirmish where you can temporarily defeat and rob your opponents (similar to a bar fight - the winner takes it all) and then you can continue playing as normal, as mentioned, with additional answer options and outcomes.
