People using mental illness as an insult is nothing new. As long as it's being done IC, I see nothing wrong with people doing that. It might be an OOC stereotype leaking in, but well, it's not the only one.
As far as assumptions or whatever go, people can assume all they want. That type of insanity does exist, it's just far from being the only or even the most common type. If people want to assume that is what constitutes insanity, then oh well. Just means they'll miss the more subtle types.
For my part, I find playing mentally damaged characters very intriguing. I'd like to think I do it well. I don't care much for the crazy psychopathic ax-murderer type, I find that rather dull compared to the more subtle, pervasive issues.