The show is kind of based in purgatory, the world between heaven and hell that isn't the living world. But it's not purgatory to the fullest extent. Purgatory means you die and then you go there, it's cut off from the living world. But the Island has a connection to the living world. As in people can leave and come back when they please. A way to prove that it isn't purgatory is that one of the characters say in the show that children are basically, automatically entered into heaven when they die. So it wouldn't make sense for Claire's baby, or Walt to be there. Not to mention, Walt actually leaves the Island.
The Island is a form of Paradise. It's where the dead go to resolve unsolved issues in their lives. To show that it's a form of paradise, notice how awesome it is there for the survivors and how nice it is?
And showing that there is a connection to the outside world, when John Locke stops pressing the button, the electromagnetism explosion actually connects with the outside world in an Icy, snowy place (I don't know where to be honest). And the fact that Benjamin Linus has been there his whole life. But the Island is meant for the dead, that's why the smoke monster is there trying to kill "The Others", because they don't belong on that Island.
Now for my theory as to why it basically became Purgatory at the end and why the story became so damn confusing, it's simple. It was never meant to be. Directors and producers in Podcasts years ago have stated so many times that it isn't Purgatory. But nobody believed them. I think the staff just gave up and decided to just shut the fans up and make it Purgatory.