Having played around 5 or so games either with or against Illaoli, it seems that her E is extremely powerful, almost more so than her ultimate. However, the initial damage from the "spirit" body isn't the problem. The problem is that it is extremely difficult to not become a vessel.
Attacking her lowers the length the spirit is alive for by 1 second every time she's hit. Becoming a vessel also isn't that hard to deal with. The visual of tentacles spawning off of you is something you have to watch for, sure, but avoiding those tentacles damage is as simple as moving. Even walking in range of an existing tentacle, those hits are also very predictable. It's annoying to deal with, but has clear counters and isn't that hard to manage.
Its pretty easy, you just have to zone her off. Dealing damage to Illaoi will reduce the spirits duration.
This, of course is what will separate the good Illaoi's from the bad, when and where they choose to use their test of spirit. I have played as or against Illaoi several games as well and have not had that many problems with her.
Pro tip: lining up your damage abilities so that they hit the spirit AND the actual target makes for good damage. Ergo, if you are fighting against one, and she gets your spirit, try harassing her AFTER she blows an ability. Specifically, her Q.
Also, dont forget, if you cant fight her, or zone her off, just run out of range. yeah, you become a vessel, but the tentacle slaps are easy to dodge and you only need to destroy 3 of them to end the curse early. AND by running out of range, you forgo her free damage.
