Do you really believe that type of policy could be instituted in the real world? If you were responsible for the decision and it was your kid kidnapped, would you consider her dead? The biological imperative to protect one's offspring is too strong for that (much less the imperative for politicians to CYA).
You may argue that it is a false dichotomy, but I disagree, because the people who will kill to get their compadres released will adjust their tactics until they find the lever that works.
There's a reason we specifically don't let the relatives of victims make choices here. This "you would never accept this policy if it were your child" argument is really irritating. No, I wouldn't, and that has no bearing whatsoever on the merits of the policy.
I agree that it would probably be fairly tough to institute in a democratic country. But I think it could be doable in a reasonably (but realistically!) rational country. The long-term effect should be a vast reduction in the quantity of kidnappings, since you render them ineffectual.
Such policies are already implemented sporadically. Look at various navies' responses to Somali pirates and their hostage-taking, or the way the US negotiates (or, rather, doesn't) with the occasional terrorist who kidnaps a US citizen and threatens to behead them.
You may argue that it is a false dichotomy, but I disagree, because the people who will kill to get their compadres released will adjust their tactics until they find the lever that works.