My own thought on horror in RPGs is that its the threat of losing player control of the character. I suppose this is the same horror of maiming, disease and imprisonment - the loss of some aspect of the self, the threat of diminishment rather then the finality of death. In games especially, powerlessness or loss of use of the character is the ultimate sanction.
Yet it’s not especially effective when you can just roll up another “toon”. Detachment and easy replacement is one of the ways certain settings and rule sets (gonzo or grimdark) work to mitigate the negative emotional response to character death. However the same game aspect is also the problem of running something like a ghostly possession which is plain horrifying – looking out through your own eyes as a mere passenger while some evil other ransacks your life. If you take away the character its not horrifying to the player so much as sidelining them and asserting GM control. Once the player loses control of the PC they aren’t invested anymore and what was horrific gives way to the frustration or wry observational detachment of being railroaded.
The tricky part is to use the threat and consequence of losing some aspect of player choice while still keeping the player involved and in control. So I suspect you’re on to something with the threat of PC death. The way I do things like possession, addiction and curses is as a choice for the player - they can do something bad or face severe mechanical consequences to the PC (e.g. The ghost demon possessing you insists you desecrate every religious shrine you find - you can resist bu you lose some stat each time you do). The player can still control the PC, remaining in the game, but that demon gets to tell them what to do all the same or slowly chews away at the PC’s play-ability - and even if there an exorcism or whatever, doing the noble thing - resisting the horror will have a permanent mechanical cost.