h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

Sanity is derived from the Latin word sane, which means clean. (homo sana in corpus sana, remember?). Clean of diseases, nice and clean. In this time one can't really speak of a clean body or a clean human anymore, when he's free of diseases. So the word is metaphorical.
It is true that in everybody there is something that can be called insane. Everybody is different, so what's normal for me, is abnormal and thus insane for you. That's why in psychology they made a list (DSM) of symptoms belonging to a disease. Let's say, that you suffer from more than 6 symptoms on the list, we call you a sufferer of the disease, and in our society that means you are insane. In the DSM they also keep in mind that there are cultural differences. So when a man from Africa has hallucinations, this doesn't have to mean he's insane in his culture, he's more a medicine man doing his ritual.
My guess is, that a person is 'insane', when due to his disease, he can't manage to lead a normal (average) life anymore.