I don’t think it’s so much about challenging players as it is ensuring that player action feels meaningful. There’s no faster way to kill player agency than to start fudging numbers when things look grim - do it too often and suddenly every threat becomes a paper tiger. That’s not to say that death is necessary, but consequences absolutely are.

I’m currently playing in a campaign with a GM that’s done something very interesting with player death - the party’s stuck in a time loop, and each character that’s in the loop has a number of “lives” that everyone in the group can see. Every time a PC dies, the number goes down and the loop resets. It’s encouraged a surprising sort of flexibility on the part of both the players and the GM - PCs take risks they wouldn’t otherwise for fear of death, and the GM isn’t afraid to throw harder challenges at the party. The consequences of failure are muted, but still ever-present. It’s a shockingly effective means of ensuring players still have agency and the stakes feel real, while keeping a safety net in place.