>> Why should the Ins Co pay out? On someone else's death? Not the Insured's?
Your mixing two different things; this isn't Life Insurance. Travel insurance covers certain risks one of which is the death or serious illness of a close relative. If the number of such relatives and their health has the potential to defeat a claim then questions on the proposal need to cover that.
>> The Insured could still have gone on holiday, they didn't have to cancel.
Yeah, right, your kids go on holiday while you're cooling in the mortuary.
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Travel insurance 
Travel insurance 
