On my iPhone 4 it correctly adds the apostrophe after typing "Okay, then ill". As far as I can tell in all situations the phone considers "ill" to mean "i'll". If you really meant "ill" you just have to tap the suggestion to tell it no.

I can't see Apple going the route of Swype or 8pen, too confusing. Apple likes simplicity (how many decades before they succumbed and released a two button mouse?)