The Death Penalty was a feature implemented by the dev team to prevent people using death as a quick, easy way home. In softcore, upon death, half of your Coins (rounded up) will be dropped. It is possible to return and retrieve them. Your character will also only spawn with 100 health and minimal mana (if the character has any) upon respawn. In mediumcore, you lose all of your items, and respawn with 100 Health and minimal Mana, as well as a copper pickaxe, a copper axe and a Copper Shortsword. In hardcore, you permanently die, turning into a ghost, unable to interact with the world.The message "You were slain" will stay for 5 seconds and then you will spawn at your spawning point.

A character with 1 gold, 1 silver, and 1 copper will lose all his/her money when he/she dies (in case of odd numbers, the lost money will be rounded up).

Before Terraria was released, the death penalty was dropping all of your items (in patch 1.0.5, this is now true if you play in Mediumcore mode), but the Developers thought that was unfair, so they changed it to no penalty. Finally, they implemented the current system. A good way of avoiding the death penalty is to store all your money in a chest before going into caves or fighting boss monsters. That way, you will lose nothing when dying. Another way of saving money is having a Piggy Bank in your inventory, which allows you to store and access your money while underground. You can also use a Safe but a Piggy Bank is much cheaper then the Safe, being at the price of 1 Gold Coin as for the Safe being worth 50 Gold Coins.

Alternately, if you are about to die, you can (if you are quick) open your inventory and click "Save & Quit" or "disconnect" at the lower right corner of the screen. There is no penalty to this whatsoever; the Death Penalty only applies if you actually die. This strategy is much easier if you have enabled of auto-pausing while your inventory is open.

Note: Dying because of an explosion that the player causes will not result in a death penalty. They will respawn with all of their money and Items (minus the explosive used). This is because the explosive is a player thrown consumable, so if a player kills another player with one, they don't get their coins.

There are 3 types of Death Penalty:

• In Softcore mode, half of your coins are dropped.
• In Mediumcore mode, all of your items are dropped and you respawn with copper tools.
• In Hardcore mode, your character dies permanently, and although you will still respawn once, this will be as a ghost, and you will not be able to interact with the environment anymore. Upon leaving, the character will be automatically deleted.