One thing my wife and I have discovered while caring for an elderly parent is that certain medications can trigger hallucinations. Sometimes doctors prescribe anti-anxiety medications or sleep aids for elderly patients, but if the dosage is too strong or the person takes too many of them at one time, the result can be hallucinations. One of my mother-in-law's worst hallucinations was triggered by the sleep medication Ambien. We had no idea she would have such a bad reaction to it.
We might think an elderly person is exaggerating when he or she talks about hallucinating at night, but it definitely feels real to him or her. If an elderly relative starts talking about seeing strangers at the foot of his or her bed or hearing people talk in the hallway, you may want to get a consultation with a neurologist familiar with the elderly.