Language drift and change, in and of itself, isn't good or bad. It's just the way language works. Words change meanings, fall out of usage, new words are created.
Borrowing a word from another language isn't inherently wrong . . . . but as several folks have pointed out, context matters. Linguistic context, and cultural context.
Phylactery was originally a Greek word, that overtime, became associated with a Jewish religious practice, which is now the primary meaning of the term. Gygax borrowed it, likely ignorant of it's context, or perhaps not fully understanding the context.
To continue using the word in D&D to describe a soul vessel for an evil undead abomination is disrespectful and insensitive to those of the Jewish faith for whom the word has a sacred and important cultural meaning.
Not all those of Jewish descent and/or Jewish faith use the word, or care about the word, or are offended by D&D's use of the word . . . . but enough are, and that's enough to make it an inappropriate usage.
By removing the word phylactery from D&D (and similar games, like Pathfinder), we aren't really losing much of anything other than a cool sounding word. And we're making progress on making the game more inclusive. It's a good trade, IMO.