They did not actually die they make an appearence on dirge of cerberus which is based after ff7
They did die. It is explicitly stated in FFVII by Barret that all three of them died.

I don't think those two characters are supposed to be Jessie and Biggs
I agree, I think they were just reused sprites. Aeris was 7 in the flashback, as Elmyra says her husband was sent off to war 15 years ago. I'm sure it's possible that B & J could have been teenage lovers at that point, making them slightly older (Barret is 35, so they're not all young). Still makes Jessie liking Cloud a little dodgy...but hey, his mom said he needed someone older! Hehe.