I like this idea. A lot. It seems quite similar to the concept of True Names in Ursula Le Guiin's Earthsea Quartet.

One thing I'd suggest is, yes, mages should be able to reach beyond themselves in emergencies at the cost of hp, but either make the hp damage scale or make certain levels unusable (maybe a mage can only reach 1/2 levels beyond their ability).

For example, someone suggested having a top-level word do 11hp damage - a 4th-level mage with 16hp (average) could just Immolate once a day and destroy your carefully-prepared low-level BBEG. Ideally, even TRYING to use such a word at such a low level should destroy the unwise caster utterly.