They have lost a beloved teacher and a friend with diabetes. I'm sorry to hear of the loss of your friend. In working with the students who are also experiencing that loss, it would be important to allow them to express their feelings about her death. When people are expressing grief, they are not so much looking for someone to fix their sorrow as much as they are looking for someone with whom to share their sorrow. The answer is, you don't.
Denial is essentially a psychological shot of Novocaine.
People use denial when they are feeling overwhelmed by the demands being made upon them. Denial can be effective if it helps a person adapt to their illness and their life. Denial is dangerous if it results in the person engaging in risky behaviors, such as not taking prescribed medications or following up with appropriate medical treatment. It can be frustrating to see a seriously ill person denying their illness. However, that may be their best attempt at adjusting to the illness.