I have it disabled for SMS messages. I am not so much complaining that it offers SMS tie-in, more that it is unreliable in its transportation, so knowing how you're sending a message is more important if you want the person to receive it.
The problem exists for iPhone users as well I think - Messages will send via SMS or Internet and there is confusion amongst my relatives with regard to it. They don't know if they've sent an SMS or if it's gone via the Internet, so I won't get messages on my Mac/iPad because it's gone via SMS etc. etc.
Muddying the method of communication is a disservice.
No it's still an option. They just didn't bother to look for it, or don't realise that they may not have the phone number and Google profile of their contacts synced...
But yes, if the person you're messaging has a phone number and Hangouts profile, and those are applied to the same contact, you can choose to SMS them or send a Hangouts message.