"They live there."
"Ali" is not in fact "far away" from the speaker and the listener, it is actually kind of reachable for both of them, maybe in a place that they both can see. It is closer to "over there". "Lá" is the one which would have this function in Portuguese, meaning that something or somewhere is REALLY far from both the speaker and the listener. (From my perspective, of course).
Questo/quello refers to objects or beings (while questa/quella being the same thing with feminine nouns instead of masculine). Lì/qui refer to location.
There are subtle differences between Lì and La, it's essentially the same but seems to generally agreed Lì is closer, like a person is there, across the room, while La is further, like the person is there in that building.
Qui is a more precise here, like here is the sandwich on the table, while Qua is general, like the person is here at this party.
I put vivono and it was accepted. In this context vivono and abitano seem almost synonymous, but generally "vivere" has more to do with existing, being alive, whereas "abitare" is restricted to residing somewhere, inhabiting a place. (Same in French, "vivre"and "habiter", one could say "Il vit à Paris" and "Il habite à Paris", but "il vit encore" (he still lives/is alive), not "il habite encore" (unless you add "à Paris", which would give the meaning He still resides in Paris)
Primarily older, literary Italian.
Here is a nice explanation of Egli, Ella, Esso, Essa, Essi, Esse: //www.thoughtco.com/forgotten-italian-subject-pronouns-2011380