Acquisition of Nationality by Residence
Special provision is made in the Nationality Law for former citizens of British Mandatory Palestine. Those who remained in Israel from the establishment of the State in 1948 until the enactment of the Nationality Law of 1952, became Israeli citizens by residence or by return.
According to an amendment (1980), further possibilities to acquire citizenship by residence, were included in the law.
The residence provision basically only applies to people who were living in Palestine pre-1948.
Since your husband was born outside Israel, he must’ve inherited his citizenship from his parent(s), and therefore does not pass on the citizenship to his kids if they are also born outside Israel. (The only time this would not be the case is if your husband became an Israeli citizen AFTER he was born i.e. Naturalization or Law of Return – as opposed to him becoming a citizen by virtue of being born to an Israeli citizen.)