The horror of SLA with the insanity of HOL sounds delightfully terrifying.
I am of two minds about sanity systems.
One one hand, mental illness isn't scary; it's just sad. Forcing an affliction on a character takes away the player's freedom of control, but then again, loss of control is exactly for what the game strives. Also, there are many GM's and players who would have difficulty handling insanity in a reasonable and adult fashion. Losing your mind is awful; it doesn't turn you into a Steve Martin character. As Christopher Titus said, "Insane, not crazy."
On the other hand, it is the very lack of player and GM ability that a good system should aid. It should internalise the problems, so that the conditions of the illness are reinforced, rather than focusing on the external actions. Also, it is good to have a game system that supports its chosen themes and genre. A game where going mad is a core element would be totally remiss not to have at least a subsystem of some sort to that effect.