With an upside down house and an overall insolvent estate, you might want to consider doing nothing. If you were to open probate, you would essentially be administering the estate on behalf of the creditors. While the court would probably grant you some compensation for administering the estate (which would be payable before the creditors get anything), it would likely be a lot of tedious effort for minimal compensation.
If you decide to not undertake the probate task, I would suggest writing the lender and creditors informing them that the probate estate is insolvent, that you do not intend to open probate and administer the estate, that they are free to do so if they wish, and, if they wish to open probate, you will be glad to waive any right that you have to administer the estate. Don't even mention the life insurance proceeds.
Whether you inform them or not, you will probably receive calls from the creditors. Some may imply that you have an obligation to probate the estate. Some may try to persuade you that you have some "moral obligation to pay them. Tune them out. You don't.