"And do not say about those who are killed fighting in the Path of Allaah that they are dead. Rather, they are alive!" [Soorah al-Baqarah 2:154]
This verse is an apparent proof that the martyrs [those who are killed in the Path of Allaah] are not dead. Yet in another verse Allaah says, whilst addressing the Prophet Muhammad sal-Allaahu 'alayhe wa sallam; who is better than any and every martyr:
"Indeed you will die, and they will die." [Soorah az-Zumar 39:30]
The reply to this [apparent contradiction] is: That the martyrs are dead from a worldly point of view, this is why they can be inherited from, and why their wives can remarry again - a point about which the Scholars have ijmaa' (consensus) upon. It is this death, the worldly death, that Allaah informed would occur to the Prophet sal-Allaahu 'alayhe wa sallam. This is why Abu Bakr as-Siddeeq radi-Allaahu 'anhu said, when the Prophet sal-Allaahu 'alayhe wa sallam passed away:
"May my mother and father be sacrificed for you O Prophet of Allaah! By Allaah! Allaah will never combine two deaths for you. You have died the death that Allaah decreed for you ... Whosoever worships Muhammad, let him know that Muhammad is dead."
Then he deduced this by reciting the [above] verse, and the Companions of the Prophet sal-Allaahu 'alayhe wa sallam accepted this. 
As for the life that Allaah affirmed in the Qur'aan for the martyrs, and the life that has been affirmed for the Prophet sal-Allaahu 'alayhe wa sallam in which he is able to return the greetings of salaam to whosoever sends it upon him, then both of them refer to the life of the barzakh (a state of existence between the present life and the Hereafter); an existence which cannot be truly comprehended by the people of this world. So with regards to the martyrs there is a reference to this in Allaah - the Most High's - saying:
"Rather, they are alive, but you do not perceive it." [Soorah al-Baqarah 2:154]
The Prophet sal-Allaahu 'alayhe wa sallam explained this verse by saying:
"Their souls ore in the bellies of green birds, which hove lanterns suspended for them from Allaah's Throne. They roam around in Paradise wherever they desire, then return to these lanterns ..." 
As for [the life affirmed for] the Prophet sal-Allaahu 'alayhe wa sallam, then he said:
"There is no one who sends the greetings of salaam upon me, except that Allaah returns my soul hock until I reply to their greeting." 
"Indeed Allaah's Angels roam around the earth conveying to me the greetings of salaams from my Ummah." 
So this life also cannot truly be comprehended by the intellects of the people of this world. Since, along with this [fact], his sal-Allaahu 'alayhe wa sallam's blessed soul resides in the loftiest part of Paradise with the companionship of the highest company; a company higher than the souls of the martyrs. Yet the reality of how his pure soul links itself to his noble body 'alayhis-salaam - a body which the earth cannot consume - is a reality which no one knows, except Allaah alone. Thus, if this type of life was like the life that is understood by the people of this world, then why did Abu Bakr as-Siddeeq radi-Allaahu 'anhu say that the Prophet sal-Allaahu 'alayhe wa sallam was dead, and why was it permitted to bury him? [And if he sal-Allaahu 'alayhe wa sallam did not die] then why was there a need to appoint a khaleefah (succesor) after him. Also, those events; such as the [tragic] killing of 'Uthmaan radi-Allaahu 'anhu, or the differences which arose between the Companions, or that which occurred with 'Aa'ishah radi-Allaahu 'anhaa need not have happened if he sal-Allaahu 'alayhe wa sallam were still alive! Since if that were the case, they could have referred judgement back to him concerning those issues in which they differed [if he sal-Allaahu 'alayhe wa sallam were still alive and could fulfill such needs].
Thus, just as the Qur'aan is explicitly clear that the martyrs are actually living; due to Allaah - the Most High's - saying:
"Rather, they are alive."
Then likewise, the Qur'aan is just as explicitly clear that this state of living is one whose reality cannot be truly understood by the people of this world; due to Allaah's saying:
"But you do not perceive it."
Similarly, just as it is established that the Prophet sal-Allaahu 'alayhe wa sallam is living in the grave; replying to the greetings of salaam, yet even though his Companions actually buried him, they were still unable to perceive this state of living. Thus, we know that this state of living is likewise a reality which cannot be truly understood by the people of this world. However, what could make this more clear is by considering the example of someone who is asleep. The state of one who is asleep differs from that of one who is awake in many ways, including the fact that the one who sleeps experiences dreams which can be understood. And Allaah knows best.
Imaam Ibn al-Qayyim (d.751H)- rahimahullaah - said:
"It is known by necessity that the Prophet sal-Allaahu 'alayhe wa sallam's body is intact and has not decayed. The Companions asked him: How are we to send greetings of salaam upon you when your body has decayed! So he sal-Allaahu 'alayhe wa sallam replied:"Indeed Allaah has prohibited the earth from consuming the bodies of the Prophets." 
So if his body was not in his grave, then why would he respond to this question! And it has been authentically established from him that he said:"Indeed Allaah's Angels roam around the earth conveying to me the greetings of salaams from my Ummah." 
It is authentic from him that he once came with Abu Bakr and 'Umar [into the mosque] and said: "We shall be raised up like this on the Day of Resurrection."  It is also established that he sal-Allaahu 'alayhe wa sallam saw the Prophet Moosaa praying in his grave on the night of his Israa (Heavenly Ascension), and he also saw him [on that same night] in the sixth or seventh Heaven.  So the soul is in one place and is connected to the body, which resides in the grave. Similarly, the Prophet sal-Allaahu 'alayhe wa sallam is in his grave; replying to the greetings of salaam sent to him, along with the fact that his soul resides in the loftiest part of Paradise along with the highest companionship. So there is no contradiction between these two matters; since the affairs of the souls is one thing, whilst that of the bodies is another." 
So in these words is a proof that the life of the barzakh, that was previously mentioned, is a life whose reality is not known to the people of this world. About this Allaah - the Most High - said:
"Rather, they are alive, but you do not perceive it."
And complete and perfect knowledge is only with Allaah.
 Related by al-Bukhaaree (nos.124 1-2), from 'Aa'ishah radi-Allaahu 'anhaa. Refer also to al-Bukhaaree (no.3667, 4452).
 Related by Muslim (no.1887), from Ibn Mas'ood radi-Allaahu 'anhu.
 Hasan: Related by Ahmad (no.10817), from Abu Hurairah radi-Allaahu 'anhu. It was authenticated by Ibn Taymiyyah in his Majmoo' Fataawaa (1/233).
 Saheeh: Related by an-Nasaa'ee (2/43). It was authenticated by Shaykh al-Albaanee in Saheeh Sunanin-Nasaa'ee (1/274).
 Saheeh: Related by Abu Daawood (no.1047), from Abu Hurairah. It was authenticated by Shaykh al-Albaanee in his Takhreejul-Mishkaat (no.1361).
 Saheeh: Refer to footnote no.5
 Da'eef: Related by Ibn Maajah (no.99). It was declared to be weak by Shaykh al-Albaanee in Takhreejul-Mishkaat (no.6054), because the chain of narrators contains Sa'eed Ibn Marlamah, who is not a strong narrator.
 Related by Muslim (7/102).