Lyric discussion by Michael Furey 

Cover art for Insurance Fraud #2 lyrics by Mountain Goats, The

I don't think he means "sister" literally.

This is a song about denial.

The guy and his wife used to joke about burning down their house and retiring to Cancun with the money.

One night they have a fight, she leaves, and wrecks the car. Instead of mourning her, he gets angry, insisting she faked her death.

I don't think so, 'bag full of oily rags' and 'fifty cent lighter' would suggest that this person is stuffing their fuel-tank with flammable cloth, and lighting it, thus destroying the car, so that they can collect on the insurance. The 'dreams of retirement in Cancun burning ever brighter' line is a fairly obvious metaphor for this person's rekindled dreams, as well as literally referring to the burning car. I assume that this person dies in the incident, i.e. 'college graduation photograph/ splashed all over the six o'clock news'.