In terms of LLM hallucination, it feels like the name very aptly describes the behavior and severity. It doesn't downplay what's happening because it's generally accepted that having a source of information hallucinate is bad.
I feel like the alternatives would downplay the problem. A "glitch" is generic and common, "lying" is just inaccurate since that implies intent to deceive, and just being "wrong" doesn't get across how elaborately wrong an LLM can be.
Hallucination fits pretty well and is also pretty evocative. I doubt that AI promoters want to effectively call their product schizophrenic, which is what most people think when hearing hallucination.
Ultmately all the sciences are full of analogous names to make conversations easier, it's not always marketing. No different than when physicists say particles have "spin" or "color" or that spacetime is a "fabric" or [insert entirety of String theory]...