This card works very well in a Machine deck using "Power Bond", as you will gain life points equal to the Monster's Original ATK from Power Bond's effect rather than taking damage.
If you activate Scapegoat during your opponent's End Phase and then during your turn change all tokens to attack position and activate Rainbow Life, you can gain a lot of Life Points by attacking a strong monster on your opponent's side of the field (Example: Attack an opponents Ryu Kokki with 2400 ATK. Your gain is 2400 × 4 = 9600 lifepoints!). Activating Scapegoat during your opponent's turn also allows you to Summon a monster normally.
You could combine this card with "Alchemy Cycle" as well, that way you can increase your life points and draw some extra cards.
Use this combo on cards like "Grave Squirmer" and you can destroy your opponents best monster and gain life points.
If you have a face up "Colossal Fighter" and your opponent has a stronger monster, activate this card and suicide Colossal Fighter, activate Colossal Fighter's effect to special summon himself from the Graveyard and suicide it again to gain a lot of Life Points.
With "Fire Princess" out, this is an OTK with any card to significantly raise your opponent's monster's attack enough for this infinite attack loop of "Colossal Fighter", such as "United We Stand".
Here is another combo with "Fire Princess" and this card. When you use Rainbow Life with 2 "Manticore of Darkness" in your hand (or "Foolish Burial" for the other Manticore of Darkness if you do not have another Manticore of Darkness in your hand to discard for the cost of Rainbow Life), and "Skull Invitation" activated, you'll win by infinitely looping the summons of the 2 Manticore of Darkness while Fire Princess will damage your opponent due to Rainbow Life making Skull Invitation (or "Fatal Abacus") increase your life points instead of damaging you.
You can chain this card at the end of your opponent's "Chain Strike" combo to gain a good load of Life Points.
You can chain card similarly to how you chain "Waboku", but you have to discard. It can still be more useful than Waboku in response to a direct attack, however.
You can take a risk and use "Battle Mania" then chain with this card to gain some Life Points if you're in a pinch.
For example, if your "Brain Research Lab" would be destroyed while you have 8 or more counters on it, you can use this card's effect to gain 1000 Life Points for each Psychic Counter instead of losing 1000 for each one.
Combine this card with "Staunch Defender" and Astral Barrier, while your opponent has many powerful monsters on their field, to gain a lot of life points.
If you have "X-Saber Palomuro" in the graveyard you can use "One for One" to Special Summon one more from your Deck or Hand or you could just simply Normal Summon it. Activate "Rainbow Life" and attack a strong monster your opponent controls, you will gain Life Points and then you can pay 500 Life Points with the "X-Saber Palomuro" in your Graveyard and Special Summoning him thus starting a loop. Just make sure you gain more than 500 Life Points; otherwise, it would be pointless.
Combine this card with "Greed". Use cards such as "Reckless Greed" and "Dark World Dealings" to draw as much as possible, then go to your End Phase. Greed's effect activates, but instead of taking 500 damage for each drawn card you gain 500 instead; this could potentially give you enough Life Points to hold out for the Exodia cards if you are unlucky enough to get all five this turn. Because you can end the effects of cards like this (Rainbow Life I mean) at any point during the End Phase, this strategy is legitimate.
In a "D/D" Deck, use this card to keep yourself from taking damage due to the effects of "D/D/D Wave King Caesar" and the "Dark Contract" cards. A "D/D" monster can be discarded with the effect of this card for later retrieval or revival by the effects of other "D/D" monsters.
Also works great with a Aroma Deck for speed up and boost up your LP.
You can use this combo for make a great surprise to your opponent. At the Battle Phase, your monster is going to be destroyed. Use Rainbow Life in Chain 1 and in Chain 2 active "Option Hunter" for win LP by the Damage Step + by your monster destroyed this turn.