The Internal Revenue Service can pursue back-owed taxes by seizing death benefit funds. The IRS doesn't perform this action if the deceased failed to pay their taxes in full. The only time the IRS considers death benefit monies an asset is once the beneficiary receives them. As a result, the IRS will more than likely go after the funds to repay your past due taxes, especially if you have an incredibly high outstanding debt.
If you ask the insurer to pay the funds to you via installments rather than as a lump sum, you can prevent the IRS and any creditors from going after all of the money at one time. That said, the IRS can seize part of each payment or the entirety of one or more payments. Additionally, you might have to pay income taxes. You can establish a trust so that the lump sum goes to a trust account rather than directly to your checking or savings account to prevent the IRS again from taking all of the money at one time. If you choose this option, keep in mind that you then have no control over the disbursal of the funds. Also, the IRS can still take money from the payments to repay your tax debt.
The best course of action for anyone who has an outstanding tax debt is to make arrangements with the Internal Revenue Service to set up a repayment plan. Once the plan is in place, the IRS can only remove the exact amount that you agreed to repay from your checking or other account as dictated by an agreed upon withdrawal schedule. If you owe a lot of taxes, you should also speak with a tax lawyer about an offer in compromise so that you can settle with the IRS at a lower amount. Many taxpayers fail to qualify for the program, but it never hurts to check.