It's amazingly nerve-wracking and I love it. The dying process feels less mechanistic and far scarier, leads to players respecting the threat it poses.

Then he needs to seriously uptune combat for that party. If combat is rare, it should always be impactful.

You're conflating two different questions into one. 'Is there a time to punch a Nazi,' and 'If we study Nazis, can we figure out how to stop people from turning into Nazis that subsequently require punching.' I'm personally of the opinion that the answer to both is yes. There is absolutely a point in understanding evil because, as we are having so comprehensively demonstrated, Nazis are not a one-time problem. Letting things get to the stage where punching is required has consequences.

It makes a sorta-caster able to pretend to be an archer, more or less. It's great, but it's no more horrifying than a fighter with a bow of some kind.

You can still save the kingdom as a party full of evil bastards. Baron van Dyne can't usurp the crown with the aid of an army of elven barbarians, because the crown is not his to steal. It's mine.

Just like any party, you need a motivation that's compatible with cooperation and the narrative in some capacity. The only difference is that in stereotypical 'good' parties, players can just default to 'save the kingdom because it is Right' rather than having to think about it.

My group uses this, but with a separate temporary exhaustion (we call it Trauma) that goes away on a short rest. Still handily serves the purpose of discouraging yoyoing without being too punitive.