That doesn't make sense. If a policy is to pay out on diagnosis of a terminal illness then the contract of insurance can't be conditional on death occurring within 12 months because that would trigger the death provision in the policy. The policy has to define exactly what "terminal illness" means and all the consultant should be asked to confirm is a diagnosis of that illness. If the insurance company are being difficult you should go to the ombudsman or alrenatively just sue in the courts under the policy, i.e., for breach of contract. I hope that helps. Please leave a positive rating so that I am credited for my time.
No, not if the policy was in force at the time of the claim. The claim is valid and in time from your narrative.