Its an interesting idea, more realistic than being killed and magically alive at the hospital every time, although that works just fine for me. Of course, I wouldn't mind respawning just around the corner with the cops still at the scene and exacting my revenge/watching my cars chain reaction blow them to pieces.
I suppose one way of it working would be that you would wake up at the previous save/checkpoint. I think it'd be annoying to have to redo a lot of stuff, but we already have to do that now anyway, and in older GTA's you need to go find weapons again EVERYTIME unless you do reload the game. Glad they fixed that with 4.
Still, I prefer the respawn nearby, with weapons