This is precisely what happened to Vanessa Valentyne when she sought payment under her son's life insurance policy from The Canada Life Assurance Company. Vanessa's son, Kevin, was a known drug dealer. In 2013 he was out for lunch with his girlfriend when he was summoned to a house by two of his associates. He drove to the location and left his girlfriend in the running car while he stepped inside the house. He was never seen or heard from again.
Four years later, a British Columbia Supreme Court justice has upheld the insurer's refusal to issue payment under the policy on the grounds that the exclusion applied: "I need only be satisfied on a balance of probabilities that his death was a result of his involvement in criminal activity," wrote Justice Catherine Murray. "The only rational conclusion is that Mr. Valentyne was murdered as a result of his involvement in drug trafficking, a criminal offence."
You can read more about the interesting facts underlying this decision here and here.