KISS: I'd want to keep a good chunk of the life insurance money available to me given the large amount of uncertainty in the near future. Tying it up in a house is not a great idea in my opinion.
TL/DR:
Mortgage is 180k.
Life insurance is 150k.
She'll be in the red with her 3500 per month unless she pays off the house.
As somebody else said: If she applied the 150k to her mortgage, that would leave 30k left.
Her mortgage payments wouldn't decrease until remainder of house was paid off (the last 30k).
Assuming her mortgage payment was ~$1000 a month (I have no idea how close to truth that is), let's say it would take ~3-4 years to get that last 30k paid off? 1000x12x(3-4) = (36000 to 48000). 6k to 18k might go toward interest, the other 30k would apply to the principle. (note, i have no idea how close to reality that is without knowing terms of herloan).
That seems like a long time to be in the red to me. But for those 3 or 4 years, she'd have to cover the monthly "red" amount with other money. Let's pretend that red amount is $500 per month. That would be $6k per year for 3-4 years. That's like 18-24k in total. Would she have enough other cash to close this gap over that long of period? And at the end of that period, her cash would be more or less depleted, and she'd be very slightly in the black while she continued to work? But is she remembering that if she's paying mortgage payment which includes escrow (insurance and taxes) that those expenses would still be need to be paid even after mortgage is paid off?
Regardless, the upside of paying the mortgage off (being very slightly in the black a couple hundred a month), doesn't seem that significant (i.e. being in the black in 3-4 years).
The downside of paying the mortgage off (being house poor for the next 3-4 years) and being extremely illiquid seems to be very significant.
I would probably recommend the following:
Keep a good portion of the cash fairly liquidable. Take 30-40k and put into a high yield money market, savings account, or even a CD ladder.
She can cover the monthly gap with the 30-40k for the next 5-6 years. That would give enough time to comfortably invest in the market with a reasonably high chance of coming out ahead. So, the remainder of that money would go into a brokerage account and buy VTI, or FZROX, or any of the other low cost total market index funds. Some of that money could also go into a low cost bond fund. She's in her late 50's, so maybe that's 80/20, or 70/30, or whatever allocation she would feel comfortable with. This would allow a good percentage of her life insurance payout to increase.
While she's still working, I might also start easing some of that money into a traditional ira, given the amount of income you are saying she has. That will further lower her tax burden and she will be able to keep more of her take home pay.