After thinking about it more, I think the main issue I have with it is that it sort of anthropomorphises the AI, which is more of an issue in applications where you’re trying to convince the consumer that the product is actually intelligent. (Edit: in the human sense of intelligence rather than what we’ve seen associated with technology in the past.)

You may be right that people could have a negative view of the word “hallucination”. I don’t personally think of schizophrenia, but I don’t know what the majority think of when they hear the word.