What happens when the flash inside the arduino hits 10,000 writes and dies ?

Nothing is backed up, unless you have at least 3 copies of it. One physically at a different location (fire,flood,volcano,earthquake,...)

Another thing is what happens when the owner of the wallet.dat file ultimately dies (through accident or natural causes) and brings the security pass phrase with them to the grave ?
Yes the value of bitcoins increases for everyone else as there are fewer coins, but that is of no help to the remaining living family who are broke.