I was confused at first, but RoJoHen posted this explanation in the live commentary thread, and I'm going to repost it here because I agree with it as well and IMO this is the best explanation for what just happened:
So everything DID happen on the Island. Only the S6 flash sideways were "Purgatory", not the entire series, everything did happen, but as they all died, in the end, very end (probably why its called "The End) they all re-connected in "Purgatory" or an afterlife, before moving on, because it meant so much to them. So the Island is NOT a dream, and NOT purgatory. The Island is real, the Light is real, Jacob/MIB is real, time traveling Losties is real, and on and an on....
It also means we got NO answers to anything about the Island. What is the Light? What is Jacob's "Mother"? Who created all the stuff on the Island, who made the cork? How can it time travel and move? and on and on and on.......
No, they all died at various times in their life. Jack died on the Island like we just saw. Frank rescued people on the Ajira plane, but they all died at some point after living their lives. Hugo and Ben died at some point after watching over the Island.
But they all went to the Alternate Reality (Afterlife) and found each other!
So everything DID happen on the Island. Only the S6 flash sideways were "Purgatory", not the entire series, everything did happen, but as they all died, in the end, very end (probably why its called "The End) they all re-connected in "Purgatory" or an afterlife, before moving on, because it meant so much to them. So the Island is NOT a dream, and NOT purgatory. The Island is real, the Light is real, Jacob/MIB is real, time traveling Losties is real, and on and an on....
It also means we got NO answers to anything about the Island. What is the Light? What is Jacob's "Mother"? Who created all the stuff on the Island, who made the cork? How can it time travel and move? and on and on and on.......