Every human, when manifested in the Netherrealms, has a Lifeline that connects them to the two remaining Queens of the Netherrealms.
When a person dies, their Lifeline evaporates and its light goes to the Fountain of Souls – a galaxy filled with Earth’s souls – waiting to either be reforged or reincarnated.
When a soul is still young, it gets sent back to earth as a whole, ready to take on a new experience.
When a soul becomes too old, it is reforged, together with other Old Souls, in the Fountain. It is then formed into a new, young soul.
This wasn’t always the case, and souls were always sent back to Earth as a whole. After an incident that wiped out half the population in the Netherrealms, Than created the Fountain to prevent this from happening again.