Ah I remember being that age, or a little younger, and going through the processing death stage. I'd seen dead pets, but this was about realising that when people get old, even people I know, they die, so old people I knew would not be alive for much longer before they died. I did horribly tactless things like playing the funeral march on my keyboard once when my grandma was visiting, and thinking she'd like it/find it interesting/think it was relevant and I was a clever girl, because she was old and would likely die soon. (Incidentally, she didn't.)
But it was also grimly fascinating to me that anyone can die at any age, even babies and children, and you might not even expect it — though that never felt quite real to me, as it didn't seem to ever happen in real life (I got lucky, and as a child was obviously sheltered from some things too).
I wasn't dangerous or psychopathic and didn't want anyone or anything to die (at that age I was the kid who'd run up to a group of bigger boys in the infants playground who were yelling "bloodsucker, bloodsucker" and about to stamp on an earthworm, push them away, rescue the worm and take it to some nice safe soil), but I was autistic and that probably affected my level of understanding of my grandma's potential feelings about me welcoming her into the house with death music. OP, you say you're autistic — is your niece genetically related to you?
I doubt she understands what the death gesture is actually miming — it's probably a fairly arbitrary gesture to her, like pointing at your temple and making circles for crazy, or thumbs up for okay, and she (hopefully) won't be thinking of all the horror/thriller films adults see where it's used as a threat.