This is what William himself claimed on his deathbed in May 1219, according to his medieval biography, an Old French epic poem called The History of William the Marshal:

“One day he was lying in bed, supported by Sir Henry FitzGerald who was deeply upset to see him suffering; many of his knights were about him, too, all sharing in the pain they saw him endure: it was causing them great anguish – they were all distressed and filled with grief. Sir Henry said:

‘By glorious God, sir, you must think now of your soul – we’re most concerned. You know that Death respects no man: no matter how great his nobility, his wisdom, his prowess, no one can defend himself from Death. And the clergy insist that no man is safe unless he returns what he has taken.’

The Marshal replied: ‘Bear with me a moment, Henry. The clerics are too hard on us! They shave us too close! I’ve captured five hundred knights and kept their arms, their destriers and all their gear. If that means the kingdom of God is barred to me then that’s that – I can’t give them back! I can do no more for God, I’d say, than yield myself to Him repentant of all my misdeeds, of all the wrongs I’ve done. Unless the clergy mean to see me damned they should stop their harrying! Either their claims are false or no man can have salvation!’” (pg. 219)

William is referring to a time when he was basically a professional jouster in his youth, about 40-50 years earlier in the 1170s. He travelled around northern France fighting in tournaments and winning fame, and more importantly, money, which defeated opponents paid to ransom themselves. In one tournament season, one of his clerks recorded that William and another knight, Roger de Jouy, defeated 103 men and split the profits between them. So over several years, I guess it would be possible to defeat 500 challengers in tournaments.

But of course the History is also meant to be propaganda, an idealized portrait of the perfect knight, and the deathbed scene is probably not a literal record of everything everyone said and did at his bedside, but a depiction of the ideal way for such a noble knight to die. But maybe he did really claim to have defeated 500 knights? I suppose there’s no reason to doubt he said that, even if maybe he was exaggerating, bragging about his prowess one last time.

So, William didn't face 500 challengers in sword fights to the death. They would be jousting on horseback, not fighting with swords on foot. Tournaments were like practise for warfare, where one side could be defeated and captured, and would have to pay a ransom to be released. But they were intended to be fun, a rudimentary sports league really.

Sources:

David Crouch, William Marshal, 3rd ed. (Routledge, 2016)

The History of William the Marshall, trans. Nigel Bryant (Boydell, 2016)