Life in itself is neither good nor evil. It is the place of good and evil, according to what you make it.
According to my dictionary (New Oxford American, 2e), the phrase in itself means
viewed in its essential qualities; considered separately from other things
Plug in this meaning into your sentence, and you will see why it makes sense the way it is. You may also come across the hackneyed in and of itself, which means the same thing, as in:
Life, in and of itself, is neither good nor evil…
Using only itself would also work, but then the emphasis on life would not be as strong and it would not have quite the same meaning:
Life itself is neither good nor evil.
Itself merely functions as a pronoun for emphasis. In itself, however, adds more depth, as it specifically indicates the subject is being deliberately considered in all its possible ramifications.