Traditionally,
insanity is mental disorder to a degree that causes a person to flout societal norms and risk injury to himself or others.
I like insane characters. They can make for great villains (like
Hannibal Lecter or
Alex Forrest), good antiheroes (like
Dexter Morgan), or creepy side-kicks or witnesses (like
Renfield from
Dracula).
In fiction we can find the cold cruelty of the
psychopath or
sociopath (Hannibal or Dexter), the ravings of the
psychotic (Renfield) the instability of the
borderline personality (Forrest) and the split personalities of
Dissociative Identity Disorder (e.g.
Jekyll and Hyde). Other disorders used in fiction with perhaps less danger/risk attached are
neuroses, (e.g. Indiana Jones' fear of snakes),
autism (e.g in
Rain Man, actually a developmental disorder), and
Bipolar disorders (e.g. Sally Fields' appearance as Maggie on
ER), depression and senility.
It's easy to write insane characters unsympathetically. To do this, just emphasise their differences, the risk of danger; give them no friends, family or loved ones; show them shunned; make their mental disorder somehow their own fault, and give the reader no explanation of why they're like this.
But I much prefer insane characters who are shown sympathetically. It makes them creepier, more intimate, more interesting (and if you make your insane character the main character then you
must show it sympathetically or risk losing the audience). Lecter, Dexter, Renfield, Forrest and Dr Jekyll all have audience sympathy. To show a character sympathetically you can make them (sometimes) 'just like us' (e.g. Dr Jekyll, Hannibal Lecter), or being kind sometimes (Dr Jekyll, Dexter), or show them 'only hurting bad people' (e.g. Dexter), or 'only being a danger to themselves' (e.g. Renfield), or having friends or loving family (e.g. Dexter), or suffering bad things they don't deserve (e.g. Forrest), or their condition not being their fault (e.g. Lecter), or having great talent (Lecter, Rainman).
Insane characters often become major characters because they're so memorable. As major characters they'll need their own
character arcs. Unfortunately for the characters, their arcs are seldom good. Insanity creates an innate character tension, because the audience wants the mad character to be 'just like us' -- and for any threat to disappear. For this reason, if authors can't cure the mad character, they'll often kill, institutionalise or banish it -- and if it appears in a sequel, then any cure is likely to be temporary anyway. In reality, some forms of madness are incurable (e.g. psychopathy), while some (e.g. some psychoses, bipolar disorders) respond to drugs and therapy.
In the real world, mental disorders are very common. About one person in three will experience some diagnosable mental condition in their lives -- so if we're not a bit nuts ourselves at some time, we'll know someone who is. Since mental disorders are so
stigmatised, and
in fiction are so often associated with violence, it's often responsible to separate
the character from
the condition -- and show somewhere in your story that sure,
this senile old lady may be a chainsaw-wielding maniac, but most senile old ladies are simply helpless, forgetful and confused.
My acid test for how authors use 'Otherness' in fiction is FAB: Focus, Appropriateness and Balance.
Focus: Is this informative, accurate and well-researched, or just sensationalised, exaggerated and entertaining?
Appropriateness: Does the 'otherness' contribute to the story dramatically or is it just titillating window-dressing?
Balance: Does the story represent alternative views? (It doesn't have to represent them equally -- I just consider whether those views are acknowledged or ignored)
Hope this helps!