Caregiver has mentioned my husband could pay her to live in the house for a place he can stay when he is in town - which MIGHT happen 2-3 times a year. How have other members managed this live-in situation after the client has passed? She is not employed through an agency. Thank you!

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This sounds like you may have a future squatter. Sounds like someone said maybe she thinks you'll keep the house and pay her to care for it.
Does FIL have Dementia? The reason I ask is we had a problem when MIL passed where people claimed she promised them certain things. The things promised were the same things she promised to other people. She told a nephew and grandson they could both have the car. The people were told sorry, that there was nothing in writing. The Will only mentioned the sons. 

First, I would talk to the FIL and ask if he has promised this caregiver anything. Hopefully he has a Will. Then I would get paperwork done stating what the caregivers responsibilities are and what to expect if FIL passes away or goes into a home. Make sure it's legal.
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When my husband died, all of the in-home help we had ended. There was no after-death provision. We hugged and said good-bye. Perhaps for a long-term full-time person some kind of severance would be appropriate. Our help was through an agency.

The situation you describe is confusing to me.

1) FIL owns the house he lives in, correct?
2) He has made no provision about what will happen to the house after he dies. Does he have a will? Are his other assets accounted for?
3) What does (child and husband also) mean? Does the caregiver's family live there, too? Do they help with the caregiving?
4) Is there a written agreement as to what happens now? Something spelling out duties and payments, etc.? Are taxes withheld and reported? Is this a formal employment situation? Has the caregiver been earning SS credits while in this job?
5) Is your husband an only child? Does he (and siblings if any) wish to keep the house in the family? If he inherited it, would he sell it?
6) I do know people who have paid for someone to "house sit" -- maintain the home while the owners are away. The cases I know of have been temporary. Graduate students staying in a professor's home while prof was on a six-month sabbatical, for example. There is always the intention that the owner will come back and occupy the house again. In this case, is the caregiver proposing that she be paid to live in the house and maintain it indefinitely? Is there any intention that a family member would eventually move into the house?
7) The notion that it would be worth it to pay for someone to live in the house for the benefit of being able to stay there a few times a year seems absurd. Are there no hotels nearby?
8) On a strictly cost/benefit basis this is a non-starter. But if there is a sentimental attachment (either to the house or the caregiver) or some personal reason for keeping the house in the family, then perhaps this makes sense emotionally if not practically. If you take this route, do it through a lawyer and make sure every last detail is covered. Who pays the homeowner insurance? Who replaces appliances as they wear out? If the caregiver dies or moves to a care center, what happens to the house? Does her family continue to live there? Etc.
9) If FIL simply wants to reward the caregiver for long and faithful service and out of affection for her, it seems to me that he could simply leave her the house in his will. She'd have to figure out how she could afford to live there, but it would be a generous gift. Can FIL also afford to leave her some cash?
10) What does FIL want to have happen to the house? Is he still competent to understand the situation and make decisions?

This sounds like an unusual situation to me. I'll be interested to see if any members have had similar experiences.
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Who's house is she offering as a b&b after client passes?

Caregiver, her husband and their child are live in with FIL, is FIL verbal and competent? If yes this should be dealt with asap. Wouldn't be the 1st story about elder abuse by caregiver. Your husband needs to make sure that his dad is not being exploited. For her to offer such an odd situation throws up a red flag for sure.
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My first thought, not having been through this myself would be to sit everyone down and get a written agreement. Have it signed and witnessed; that will ensure its legality.

Why would this hired caregiver be continuing to live in the house after the client passes away?
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