The bereaved family of a man whose £100,000 life insurance claim was rejected has now been awarded the money, after their plight was publicised in The Observer.

The newspaper reported last December on the case of Nic Hughes, who died in October 2012, less than a year after being diagnosed with cancer of the gall bladder with secondary tumours in his liver. His critical illness and life insurance provider, Friends Life, rejected his claim for a payout and cancelled his policy, alleging Hughes had failed to disclose information.

Hughes had declared that he suffered from ulcerative colitis when applying for the policy, but Friends Life said he had not admitted to suffering from pins and needles, or being asked to reduce his alcohol intake by his doctor – symptoms his doctors said were unrelated to the cancer.

This left his wife, Susannah Hancock, and their eight-year-old twin sons, without the support of his £100,000 life policy.

The Observer story was picked up by the Daily Mail and the family's campaign was supported via Twitter by celebrities, including Stephen Fry and Miranda Hart. The Observer encouraged the family to take the case to the Financial Ombudsman Service.

Last week the ombudsman ruled that the policy was wrongly cancelled. In a letter to the family it said: "While the firm remains of the view that Mr Hughes did not disclose some things at the time of the application, it accepts that any non-disclosure was not deliberate or relevant to the claim he later made – so the firm accepts it was not entitled to rely on that and it should have paid the critical illness claim when it was submitted."

Friends Life has decided not to take the case to review and has instead agreed to pay the £100,000 claim in full, plus interest. This is in addition to an ex-gratia payment already made.

The life company said in a statement: "While we continue to have concerns about this case, we are sympathetic to the circumstances of Mr Hughes's family and believe it would be unfair to prolong the claim process any further."

Hancock said she was "overwhelmed with relief and joy" and "so thankful to The Observer for picking the story up and taking it on." She said that her children danced around the kitchen at the news. "It means we can carry on living here," she told them – and they cheered.