Lives are just what they say, extra lives. In Night of the Dead players do not "respawn" as one would expect, either at the start, or at some checkpoint. Instead, when your marine is injured down to 20% health, it triggers "Badly Injured." Triggering badly injured depletes a life and makes your marine briefly invulnerable, slow, and unable to attack or use skills. This is a grace period for the player to either escape danger, or have his team come to his rescue. Players should not become comfortable knowing they have extra lives to fall back on. If an attack does enough damage to go beyond the 20% health and set the players health to zero, they will die instantly. This is known as being "Critically Injured," and often comes at as a shock to new players.
Players with under 100 XP will start with 5 lives, this will decrease rapidly as they familiarize themselves with the game and increase their player Rating. As your rating is open to fluctuation, your lives should always match your current performance as a player.