he spent the last half of his time in the physical world in the earth kingdom with his tea shop. so maybe he felt more him self in that time so that's how he sees him self in the spirit world.
It's not uncommon for generals to fall in love with the very places they are conquering, look up why American Secretary of War Henry L. Stimson eventually chose Nagasaki over other arguably more effective targets during the end of WW2. Also Iroh isn't dead he just left the physical world because he felt there was nothing left for him to do there.