Good points, especially re: the will (its been on the list and we just never do it). I'm definitely not complaining, but I feel a lot of pressure not to screw up.
I think the impression she has is that there are no investments that will be safe, so might as well put it all into the house. I've mentioned that there are investments of all types (not everything is corporate stock), and that in a true Armageddon the best investment is a lot of guns, barbed wire, and Cliff bars. I'm hoping to find an adviser she likes that will explain things in a way she will believe. She just suffers from thinking with her emotions, and also having grown up with infinite $$ - luckily not a problem I had.
I'm a little confused with ROTH IRAs: This comes through in 2012, is that part of my income limit? do you have to split the limit between the ROTH and 401k? is there a good reason to just do the match on the 401k and then supplement with ROTH, or do it all in the 401k?
Also, I'm completely ignorant on life insurance. It seems to me that insurance rates factor in the risks of death for the rates, so there is a very high probability that you are wasting money - the house always wins, right? If your family is really screwed without your income, this makes some sense, but if not, it's just bringing more risk into your portfolio. Where am I wrong in this thinking?
For education accounts, are there limits to what you can put away each year, and can you use them for preschool through college? What are the advantages relative to simply having a separate account that is invested on the specific timeline?
First of off, having that kind of windfall is great, I wish I had your problem!
But to be the devils advocate, your wife wants to pay off the mortgage because she is risk adverse, at the same time you/your wife want to get a bigger /more expensive house? You have children and you don't have life insurance? Unless the more expensive house also had a working farm, if your wife was truly risk adverse, she would want to pay off the house and bank the rest to provide an income for future uncertain times (aka the coming "apocalypse").
Pay off all the "small" debts. Find a way to consistently contribute to retirement fund (or place a large sum there). Set aside private school monies. And for goodness sake hire an attorney and create a will!.
Have a heart to heart with wife, figure out where you want to be in say 10, 20 years and how your housing fits in with it.