Life insurance policy question...?

It is not difficult for a child to show insurable interest on a parent, no matter how much money the child has.

The policy holding sister can do what she wants with the money.

Your "other sister" is the one who is wrong here.

1) A child has an insurable interest in buying a policy on the parent.
2) She purchased and paid for the policy, so nobody should have an opinion about that.
3) The sister was also the beneficiary (since she bought it), so she can do as she pleases with the money.
4) The estate is responsible for the estate's debts.

At the end of the day, it sounds like sibling jealousy. You and your "other sister" should recognize that the life insurance policy has nothing to do with you. The estate should be settled per the will.

If your sister convinced the insurance company that she had an insurable interest in your mother then the sister is fully entitled to insure her mother's life. Being wealthy has nothing to do with insurable interest.
If the sister was the proposer of the policy any proceeds belong to her to do with as she pleases.

Sister who wants the life insurance proceeds added to the estate is wrong.
Your sister did not have to incur a financial lost in the event of your mother's death to purchase the insurance. she didn't "deceive" the insurance company when she purchased the policy.

Life insurance pays to the designated beneficiary completely outside of the estate. The beneficiary has no obligation to compensate the estate.

is there a certain limit on life insurance in the state of ohio that requires that taxes must be paid by the beneficiary?

Your other sister is doubly wrong.

The parent-child relationship is an insurable interest, regardless of wealth and whether there would be a financial loss in the event of death. Whether you like it or not, there was an insurable interest. The only way for your sister to have deceived the insurance company about whether there was an insurable interest would be to say that she wasn't her daughter, and didn't have an insurable interest. If she made them think she had one, then she didn't deceive them, because she did have one.

She cannot be required to use the payout from that policy to pay off Mother's liabilities. Also, not using the money from the estate for that purpose might be illegal. Life insurance money belongs to the beneficiary and they must be allowed to use it for anything for which they can use their own money, because that is what it is. Liabilities either must be paid from the estate in all cases or must be paid from the estate unless someone wants to use their own money to the pay the liabilities. In any event, life insurance money cannot be used without the consent of the beneficiary.

Your sister not only has to prove "insurable interest" (which both she and you have, as daughters, who would potentially have to pay for the funeral), but she ALSO has to have your mother's permission and consent. The insurance company would also need mom to have her doctor send her medical records in. So it's not like your sister did this behind your mother's back.

Your other sister has no grounds. The ONLY person who picks the beneficiary, is the policy owner. The policy owner is ALSO the person that has to shell out for the premiums.

And, insurable interest is not about "financial need". At all. Each of you COULD have purchased a policy on your mother's life, with her permission - and you each could have been paying the monthly premiums all these years. Only one of you was smart enough to do that.

Financial status and opinions about what the insurance benefit "should" be used for are irrelevant. The named beneficiary gets the insurance benefit without restrictions. The only relevant question is whether fraud was involved in purchasing the policy. See an attorney if you think there's a case. But proven fraud would likely just invalidate the policy - not allow you to "redirect it."

Beneficiary gets the payout from life insurance...period. What anyone else thinks is irrelevant and she wouldn't have to give away $1.