Tell that to Dr Leyton's wife.
But I agree with you. She had to live with the horror of what her father did for her entire life.
Edit: Although I'm sure she wouldn't be found 'insane' under current US laws.
Yeah, imagine finding out that your beloved father is actually Kodos the Executioner. That might drive you around the bend. And remember she was only nineteen years old when Kirk ended her murder spree. She was literally a troubled teen.
In any event, once she's exposed, she's not powerful enough to destroy an Earth colony or anything, so you might as well treat her humanely. Although, judging from what we saw in "Dagger of the Mind" and "Whom Gods Destroy," I'm not sure shipping her to a Federation asylum is exactly light punishment.