Freddie Mercury wrote this song as a dedication to John Lennon. The music emulates different John Lennon song styles, and the lyrics are mostly about Freddie's realization that John was dead, and how real life was. "Life is Real" is related to the John Lennon lyric "Love is Real."
The death of John Lennon sparked Queen to play "Imagine" during concerts, something they did during their tour with Paul Rodgers.
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This song took on a new life after Freddie Mercury's death, and is now regularly performed as a tribute to Mercury as well as Lennon - particularly when performed by Kerry Ellis and Brian May on their tours (notably the Born Free tour) where a montage of Freddie Mercury images would play on screens behind the artists.