A character's Health determines their survivability in combat. Damage that is not absorbed by a target's Armor goes straight to their Health. Potions and healing spells can restore Health in combat.
When a character's Health reaches 0, they will be Knocked Out. A Knocked Out character can be brought back in combat through the use of Active Abilities. Otherwise, characters will regain Health at the end of combat (assuming they're on the winning side).
Based on the game's difficulty setting, characters gain Wounds when they fall below a specific health threshold during combat, and will gain additional Wounds when they are Knocked Out.
Based on game settings, a character that reaches 0 health can be Killed.