I love it. I said it. Level drain the the SINGLER MOST TERRIFYING THING to old school players (Turn to Stone being a close #2). It probably doesn't kill you, but it makes you less than you were before. It is awesomely frightening. Players don't like it? too bad - they also don't like creatures that do 3d6 damage per hit or vomit gouts of acid that do 50hp of damage, but they don't whine about those as much.
However ... it never seems to make sense in the setting. Player characters have levels, but Zoff the Thief is only as good as his reputation and most recent score. Players know that vampires drain levels, but Helena is terrified of them because ... well .. because they drain levels?
I also am not a huge fan of the level loss itself as an actual game mechanic. It can be a huge pain in the ass from a book keeping standpoint in any edition, really.
My Solution, Part I
Monsters don't drain levels, they drain experience points.
For OSR games, a monster drains 500XP per HD (or 1000 if they drain 2 levels). Using BECMI a vampire would drain 7000 - 9000 XP (based on HD), while a wraith would drain 2000 per hit.
For Sorrow in Haven, they drain some amount of XP - the more dangerous they are the more they drain. A Degenerate Wight sucks out 10x the XP as it does damage on a hit (1d6 damage). A shard mite eats 1d100 XP each day.
In any case, characters do NOT lose a level, it is now just that much harder to get to the next level. If a character is dropped to 0XP, they are just dead ass dead as the last of their life is drained out.
My Solution, Part II
When XP is drained, the character makes a Save (Death for OSR, monster-specific for Sorrow in Haven). If they fail, the GM makes a note. Do this each time they lose XP.
Once everything is said and done with the current encounter the GM rolls once on the Memories of the Past Table for each failed save. Then a little flashback happens between the player and the GM ... in the scene their character must learn something. When the flashback is over, that something is gone. The memory is has been dragged out of them. Loss of XP represents a loss of self, and what is the self if not memories? Or maybe they don't get a save - up to the GM.
I've had characters lose their fear of the unknown - making them wildly overconfident; lose their trust - making them turn on their own crew members; lose their ability to understand love - that one got really dark...
When the character next gains a level, or after some worthwhile session where the PC learned a valuable life lesson (the more you know!) they can choose to lose the problem they've picked up.
So Level Drain still rules, just replaced with XP Drain.
Something awful is still awful, but now opens an opportunity for more role playing (if you are into that sort of thing).
Monsters that suck out your memories and sense self now feel more like actual monsters and less shitty. Also: verisimilitude!