We accept the reality of the world with which we are presented. -The Truman Show
Unless you are lucid-dreaming, you never realize when you are in a dream. We simply except anything that happens inside this dream, no matter how strange it may seem when you wake up and realize. Easily said, we may well be in a ‘dream’. We live in wherever our consciousness takes us. In fact, one could question that, except the difference in length between ‘a dream’ and ‘life’, they are really quite the same.
"So, since we don't know it's a dream until we wake up, can't the same be said about life, from which you exit when you die?"
I think that there really is no difference between these two ‘levels’ of consciousness, dream and “reality”. It’s consciousness that makes our world. Our consciousness makes us who we are. We know that something exists only by perceiving it through our senses. When you touch a flower, you think you know for sure that you are touching it because of the sensual feedback, but “sensual feedback” is really just signals in your brain. This makes it really hard to define existence. When you see, hear, touch, smell or taste something, your brain waves regarding the object defines its existence, not the object itself. Something exists in your world only when it exists in your mind. We only exist in our world, which in return, only exists in us.