The main factor in all tv cancellations is ratings--there simply weren't enough people watching to convince NBC to keep it. This was compounded by the fact that, at that time, NBC was looking to clear five hours of primetime programming so they could run Jay Leno's show at 10pm, Mon-Fri. If this hadn't been the case, perhaps Life would have been renewed.
At any rate, it had little to do with the quality of the second season. Some people have quibbles about certain aspects of Season 2, especially several episodes in the second half of the season. But, personally, I enjoyed Season 2 as much as the first one, and the final two episodes were excellent.
The writers apparently knew that cancellation was possible, so they wrapped up enough of the plot to provide a satisfactory, and even thrilling, conclusion. I highly recommend that you watch the second season.
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