In other words, if you have $10 k in savings, and then skip the insurance and go down to $1 k, you might end up retiring with $10 k. Whereas if you do take the insurance and your savings stay at roughly $10 k, you can retire with $100 k – given the exact same day job, etc.

Your savings compound. That's the only requirement of the Kelly criterion, regardless of everything else.

The use case of the Kelly criterion is to determine the optimal size of your capital to put at risk, where the profit you're expecting to make is linearly related to that size.

In your example you have savings which will bring in some percentage no matter what. And you have the choice of taking an insurance or not. Taking the insurance would cut your profit, but most likely not in the linear way that the Kelly criterion assumes when it calculates the optimal bet size.