For decades, the computational multiphase flow community has grappled with mass loss in the level set method. Numerous solutions have been proposed, from fixing the reinitialization step to combining the level set method with other conservative schemes. However, our work reveals a more fundamental culprit: the smooth Heaviside and delta functions inherent to the standard formulation. Even if reinitialization is done exactly, i.e., the zero contour interface remains stationary, the use of smooth functions lead to violation of mass conservation. We propose a novel approach using variational analysis to incorporate a mass conservation constraint. This introduces a Lagrange multiplier that enforces overall mass balance. Notably, as the delta function sharpens, i.e., approaches the Dirac delta limit, the Lagrange multiplier approaches zero. However, the exact Lagrange multiplier method disrupts the signed distance property of the level set function. This motivates us to develop an approximate version of the Lagrange multiplier that preserves both overall mass and signed distance property of the level set function. Our framework even recovers existing mass-conserving level set methods, revealing some inconsistencies in prior analyses. We extend this approach to three-phase flows for fluid-structure interaction (FSI) simulations. We present variational equations in both immersed and non-immersed forms, demonstrating the convergence of the former formulation to the latter when the body delta function sharpens. Rigorous test problems confirm that the FSI dynamics produced by our simple, easy-to-implement immersed formulation with the approximate Lagrange multiplier method are accurate and match state-of-the-art solvers.