Insomnia Support Group
Insomnia is a symptom, rather than a disease, and is characterized by inadequate quantity or quality of sleep. People with insomnia complain of difficulty falling or staying asleep, which results in significant impairment of daytime functioning. Insomnia is categorized as transient (shorter than one week), short-term (one to three weeks) or chronic (longer than three...

Sure. Separate out the content from the process. Meaning dreams are good, yes even nightmares. The content of the dream is another matter.
Remember, the content of a dream, even if disturbing, cannot hurt you. It is only a dream. It's OK to let it go. You can do that safely.
Sometimes the content of dreams has to do with processing memories of past events. Sometimes those memories may be painful, even traumatic. But dreams are a way for you to process those and get them out of your system so they don't bother you as much during your waking hours.
In terms of health, the process of dreaming regardless of content is what really counts. Vivid dreams like you're experiencing means you're sleeping, and sleeping well. That's because the REM dream stage of sleep normally occurs after the deepest, most refreshing NREM stages occur. So that means you are in fact getting some good decent shut eye.
It's OK to not worry about it. You can let yourself sleep. Hope that helps.
For me, my nightmares are trauma related. So even when I wake up in the morning, I'm still rattled. It feels like I'm living a waking nightmare all the time. But something my therapist suggested was asking myself how I would want thinges to go in these dreams while I'm still awake. So for example, one of my nightmares is me walking into a room where I find a woman abusing me as a baby (disturbing, I know). So while I'm awake I'll go over that nightmare over and over but I'll imagine a different outcome when I open the door. Like instead of seeing this woman abuse me, I'll see her cradling me to put to sleep. That way, while I'm in that dream because I've implanted the thought that that's what I find, that is what I find.
I've used this method with a couple different nightmares and it helps quite a bit. Maybe not all the time, but any improvement is better than no improvement is what I always say.
As far as the hallucinations when you wake up go, that sounds a lot like sleep paralysis. I think that's something that can only be remedied by medication, so you might want to talk to a professional about.