That confusing "Lost" finale explained, sort of, kind of:
THEY WERE NOT “DEAD THE WHOLE TIME"
I don't know why people are having trouble understanding this, as it is CLEARLY explained in the final minutes of the finale episode by Christian Shephard (Jack's dad). The original Oceanic 815 plane crash happened. Everything on the Island through seasons 1-6 happened. The “flash sideways” universe introduced in season 6 was a sort of stop-over point between life and afterlife (referred to here as the “purgatory universe”).
Each person in this “purgatory universe” created a reality for themselves based on their lingering issues in life