Well, thanks to being able to run the Bitcoin client yourself, or use BitAddress.org for instance, you don't need to store your coins with anyone else.

InstaWallet isn't made for long term storage of funds, but some people will use it that way.  And yes, others will have wiped their browser history and not have bookmarked Instawallet and they will never get access to those funds again.

Paymium (operator of Instawallet) offered this as a suggestion as to how they might possibly handle things if they were to close.  They have no terms of service on the site, so going that extra "brain wallet" step for those that don't withdraw is an extra service that they don't even need to do. 

You are asserting that they will simply spend the funds then themselves, and there is no reason to come to that conclusion.

They do state: "Please do not store more than some spare change here.".

As does the other instant wallet operator:

 - http://www.Easywallet.org