E120 is most common term for this substance used in ingredient labels, however they may also list it as carmine (dye) or cochineal.
Here is some information on E120:
"A deep crimson dye is extracted from the female cochineal insects. Cochineal is used to produce scarlet, orange and other red tints. The colouring comes from carminic acid. Cochineal extract's natural carminic-acid content is usually 19–22%. The insects are killed by immersion in hot water (after which they are dried) or by exposure to sunlight, steam, or the heat of an oven. Each method produces a different colour which results in the varied appearance of commercial cochineal. The insects must be dried to about 30 percent of their original body weight before they can be stored without decaying. It takes about 155,000 insects to make one kilogram of cochineal.
There are two principal forms of cochineal dye: cochineal extract is a colouring made from the raw dried and pulverised bodies of insects, and carmine is a more purified colouring made from the cochineal. To prepare carmine, the powdered insect bodies are boiled in ammonia or a sodium carbonate solution, the insoluble matter is removed by filtering, and alum is added to the clear salt solution of carminic acid to precipitate the red aluminium salt. Purity of colour is ensured by the absence of iron. Stannous chloride, citric acid, borax, or gelatin may be added to regulate the formation of the precipitate. For shades of purple, lime is added to the alum."
Now what is the Islamic view on E120?
Well from what can be found from within ahadeeth, locusts are the only permissible 'insect' that can be consumed, and is mentioned exactly by name.
Some scholars therefore deem ALL other insects as haram because they cannot be slaughtered in accordance to shari'ah, due to their small size and because they are 'bloodless' which means even if somehow slaughtered at the throat, the blood will not flow.
Imam Malik, rahiemahullah, has classed all other insects in the same category as locusts, making their form of slaughter by boiling, roasting, or piercing it with a stick/needle until it is dead, while saying the name of Allah over it.
Most people pose this question in regards to snails and their permissibility of consumption and this same information is brought up. However, shuyukh who present Imam Malik raheimahullah's argument also are sure to mention that the Prophet salAllahu alayhi wasallam never ate snail, therefore assuming, perhaps because they cannot be slaghtered and do not fall under the category of locusts. Also, the Imam is the only one to hold this viewpoint.
With that its really up to you to draw your own conclusion on eating foods with E120. And even if you follow Imam Malik's route with this one, it's most definite that they are not slaughtered in accordance to shari'ah (Allah's name being recited over it). On top of that, to me it doesn't really seem that a chemical process is taking place, since some people say that when a strong chemical process takes place the substance is an entirely different thing... all that's being done is that the color is being extracted from the insects. Allah knows best!!
Personally, whether it's halal or haram, the thought of those hundreds of thousands of insects being boiled... steamed... roasted... dunked in ammonia... is soooo disgusting!!!! So I will pass on E120... which would mean passing on red M&Ms as well... which is a easy can do in my book.
Usually I like posting pictures on my entries... but I guess considering the topic I'll pass so no one pukes on their computers and then blame me.
But in case you're interested, this is someones screen-shot of an article from when the FDA finally decided that ingredients labels should include E120 specifically rather than hiding it under "artifical flavors". There is an image of the insect in the article, which can be found here