My sister and her spouse just lost their single 40 year old daughter, W/no children. She left them approximately 225,000 each from a life insurance policy. She still owed around 80,000. On her home, and owned her car. She had no other assets. They live in California, will they have to pay a lot of inheritance tax.

There is no federal inheritance tax. CA also does not have inheritance tax.

Also, payments to beneficiaries from a life insurance policy is normally NOT subject to income taxes.

Even more important, benefits from a life insurance policy are not part of the deceased's estate. So, whatever she owed does not affect the payout from the life insurance.

Good point, Scott!