The insurance benefits are not income, but would be considered an asset if it is sitting in a regular savings account when you fill out FAFSA/CSS in a few years. There may be ways to cushion that (put it into a 529? ) It sounds like you may need to spend most of it for living expenses, and perhaps can put off taking 401k withdrawals which will be income.
It is good that you are thinking about this now, as you are deciding how to take the benefits. It’s all very confusing and getting a good plan now will help your kids feel better about their future.