There is a third situation that I think is missed
If we believe and sacrifice to live holy lives, but our belief was not saving faith. We not only lost eternity, but we lost so much here on earth
That is why Jesus warned, Just doing things in his name is not enough.. True faith is what is required.. Many will come. And he will say depart. HE NEVER KNEW THEM
Certainly the third option exists. When Jesus says "I never knew them" I think that can apply two ways. First would be the person that is working their way to heaven by their own merit, but has not true faith in Jesus, and the person who claims faith in Christ, but has not been Born-Again or Regenerate. The danger flows both ways.
True faith works; this is why we are told Mathew 7: 17-20.
"Ye shall know them by their fruits. Do men gather grapes of thorns, or figs of thistles? Even so every good tree bringeth forth good fruit; but a corrupt tree bringeth forth evil fruit. A good tree cannot bring forth evil fruit, neither can a corrupt tree bring forth good fruit. Every tree that bringeth not forth good fruit is hewn down, and cast into the fire. Wherefore by their fruits ye shall know them."