It's always invested. More likely than not at the end of life in municipal and other bonds. You know, the kind that fund the govt.

When it was initially earned, and again on the income it generated from investments.  How is it fair or equitable to keep taxing that money until there's no more of it?

Inheritance taxes are also incredibly inefficient in that they frequently force undesirable economic outcomes (e.g. sales of family businesses at distress sale prices, and even closure in some cases, with the attendant loss of jobs), but they're certainly a boon to the life insurance industry in terms of planning to pay those taxes (an arguably very inefficient use of $$ that would be better spent by being invested back in the business).

With the current exemption, the situation is much better than it once was.  Back in the days where the rates were extremely high and there were zero exemptions, the consequences were frequently dire, and not just for those who would have otherwise received the inheritance.  It was akin to the "luxury tax" that destroyed entire industries prior to its virtually unanimous repeal.