I dislike happy endings, having been spoon-fed too many unnecessary ones by Hollywood and the like... Rather, I prefer Greek drama and some Japanese genres. In which the protagonist usually dies - sometimes even without fulfilling his ultimate goal.
That said, dead PCs might make for very intense moments, but they can really hurt continuity. In one-shot games, this is not an issue, but in campaigns it is.
Thus, in the long-running campaigns that are the norm for D&D, it's usually a
bad idea to let a PC die in a non-climactic scene. Of course, killing a PC or two every now and then in such a fashion can't be avoided if the players screw up, but otherwise, it should.
In the situation that you describe, Alaska, it's hard to say whether the paladin's death had been appropriate or not. On one hand, it was a very tense, exciting moment of battle and the death of fantastic creature. Letting the paladin die would have been very dramatic, and reinforced the heroic, epic feel of the scene. But on the other hand, modern-day western audiences aren't too accustomed to fantasy heroes dying in the moment of their victory. So there is no hard-and-faster answer to this situation.
But there is answer to the means you used to save the paladin's life. Direct divine intervention is no mean feat; it is some of the most epic, dramatic situations that can occur in a game. Myself, I just would have fudged some dice or left the paladin some other kind of escape - if I wanted to save him, of course. But you chose a much more epic path. I could talk at length about what this means for your campaign, but I shall instead point you to Piratecat's excellent post which expresses it better than I could without spending great effort on it.
