Dulocracy wrote:2) Do I need to be worried about back taxes owed on money she used for college?
For clarification, you would not owe "back taxes"--the definition of back taxes being a tax liability not paid in the year in which it is due. At the time your wife was in college the proceeds consisted of a legitimate policy loan on a viable life insurance policy. Taxes are incurred to the policy owner once that policy terminates for reasons other than death of the insured, to the extent the proceeds exceed the cost basis. Taxes would be due for the filing year in which the policy is terminated, and be considered a current