I took the “You shouldn’t put this guy in a mental hospital. You should kill him,” somewhat oppositely. To me I felt like Will took it to heart, since he himself is not a 'normal' person. That instead of wanting to understand or change someone like him they should just die because they are flawed monsters, and in that moment he knew only Hannibal would truly accept him as he was, and not only that but fully embrace it.
That’s an interesting interpretation. I didn’t think of it like that, though it could very well be a combination of both. My initial reaction toward the line was shock that a young kid was talking so flippantly about murder. That along with the show’s running theme of nature vs. nurture and the often negative side effects of familial bonds (both biological and adopted) made me think that this was more of a case of Will being scared of negatively influencing Wally.
Another point of note is Wally’s use of the word “you.” He’s not saying that the police should kill Dolarhyde. He’s saying that Will in particular should kill him (I’m willfully ignoring the 2nd person plural here). That Wally automatically associates Will with murder and violence probably stings all the more.