The insurer had refused a claim on a critical illness policy in January 2012 from cancer sufferer Nic Hughes, on the basis that he had not disclosed having pins and needles or being told to reduce his alcohol intake.
Mr Hughes died in October as a 60,000 strong petition and social media campaign ensued.
An initial complaint was rejected by Friends Life, but last week an adjudicator from the Financial Ombudsman Service ruled that the insurer was wrong not to pay out.
A statement from Fos said: “This complaint was resolved at the first stage. We mediated and terms were agreed. The business has accepted the outcome of the adjudication,”
A statement from Friends Life said it would abide by the decision.
It said: “While we continue to have concerns about this case, we are sympathetic to the circumstances of Mr Hughes’ family and believe it would be unfair to prolong the claim process any further.
“Therefore, rather than refer this case to a senior Ombudsman for review, we are making a payment to the family for the full value of the claim, plus interest. This is in addition to the ex-gratia payment already made.”
It marks a tough time for Friends Life, which reported pre-tax profits of £178m in its half-year results up to 30 June 2012. This was down from £406m in June 2011.
Its February staff newsletter said negotiations about pay claims were progressing, however, its pay survey showed that staff felt they were working harder than ever but were not being rewarded. The survey also noted that employee benefits had been eroded.
Last year, Friends Life announced 150 further redundancies, in addition to the 600 redundancies in 2011 as part of the rationalisation of Friends Provident, Axa UK Life and BHA.
Richard Willets, former director of longevity, is also the latest senior member to leave the insurer. He has joined Partnership in a similar role.
The Consumer Insurance Act, which came into force last month, places a duty on insurers to ask customers all relevant questions about the specific information required at point of sale.
Friends Life said it complies with this.