Clearly insane. Crap movie.
Okay, here's some sane arguments though,
-He lost his smokes on the ferry, he was being drugged from then.
-His encounter with the cave woman was completely different to his hallucinations and dreams, that was not a role play, and it was not an imagination, the detail and the conversation were exactly like every other scene that was not a dream/hallucination.
-The woman in the cafe writes run on his notepad, only when the doctor (fake marshall) she sees everyday goes to get her water.
-The hospital staff never want him to see records, if he was insane, where would the danger be in that, seen as he's on some massive role play anyway?
-When he speaks to the doctor who says he's worked too hard for Shutter Island to let it go so easily, he suddenly tries to discredit Teddy and make him look insane. Why would he bother doing that if he was carrying out a role play, it would freak his patient out at that point.
-No-one, hospital patients or doctors smoke ciggs or eat food when he does, this is probably because it's all drugged.
-The lighthouse at the end, not to mention the orderly carrying an ice pick. Why show those two things, clearly leading to a lobotomy in a lighthouse, when moments before they argue nothing could take place in an abandoned lighthouse.
-The tape player in the lighthouse, recording the conversation to prove Teddy's insanity, and the other doctor who tries to inject him with a syringe, what would be the point of that on a role play?
-Employing an ex-nazi military guy as a prison warden.
-Allowing him to speak to Noyce so they could record and discredit him at any point.
Other peoples views - Leo asks what happened to his partner and Dr Cawley says he never had one... Leo says something to the effect that "I know your going to try to make me look insane" and Dr Cawley says something to the effect of "I've put a lot of hard work into making shutter island what it is today. I'm not going to give it up without a fight." and Leo was like "yeah, I didn't have a partner..."
I mean, what is the purpose of that threat if Leo actually WAS insane?
Well I thought the last line is what gave it away, 'live a monster or something something', meaning he had been cured of his insanity, but he didn't want to live, knowing what he'd done and what he's still capable of if he ever went insane again.
Not sure though, it's an absolutely stunning film.
I took that two ways.
If he is Teddy, he is saying he would rather die as a good man, then live as lobotomy. He looks like he is going for the doctors ice pick, but we assume he does something afterward that will risk his life. This causes the fake Marshall to have a moment of distress and call him by his real name.
If he is Andrew, then he says it for the reason you said above.
After the film I immediately thought he was insane, but them more I thought about it, the more it makes sense he was tricked.