Taking the idea of a incurable disease and going further with it, the reason that demon's aren't scary in games such as D&D is that death is only a momentary hold-up, and normaly th worst thing an enemy can do is kill you. Being dead is just a small inconvenience if you can resurrect a dead person. This plays well for heroic campaigns where the heroes are supposed to be people with the favour of powerful gods and doing deeds that the average peasant could never dream of attempting. In this sort of campaign, a demon will never have impact since it will seem like "just another monster to fight and get XP from."
If your campaign has a darker tone, then you need to have a method where death is effectively a stop. Of course, killing as many players as you can is the staple of a bad DM, so don't kill them outright. Instead, give them permanent injuries, diseases that are not easily cured, and even a sort of mental health with which people can go insane. If this sounds like Call of Cthulhu, well, it should, since CoC does many things right to make monsters scarier than D&D monsters. However, you can take many of those concepts and apply them to a fantasy world too.
Imagine if a PC gouges out an eye, or lose a thumb, or carry a disease so deadly that they will eventually die from it. All of these things have a huge impact on the game, much more than "Oh, I'm dead. Time to make a new character." Demons can fit very well in this context since in mythology and literature, demons have tried to steer people to the wrong path. Let's take the example of a demon that makes a pact with a mortal, in which the mortal's soul is forfeit in exchange for tremendous power. In a heroic campaign, a hero might find someway to break the pact or outsmart the demon later on. (Hence the whole idea behind Warlocks in D&D 4th ed.) In a dark campaign, it needs to be something permanent. You can even take things a bit more seriously, for example, if the demon gets tired of waiting until the player dies amd starts siphoning the soul little by little. Maybe the character loses his sense of taste or smell, or his eyes turn gray, or his hair turns white. That is likely to be scarier than simply dying outright. And in the end, even if the player wants to give back his power, it will be too late because of the contract.
Of course, the players must be willing to have such a dark fate for their character. If you give the chance of signing a contract with a demon to a PC, if they immediately say "Yes" then you need to stop them before they do something stupid. Explain the heavy consequences this will have, how this is not a matter to take lightly. Know your players, and if you know that something like this might upset a player that is too fond of a character, then don't offer it to them unless you want to deal with drama later on.
Sorry if I went off-topic, but that could be a way for a demon to have more impact on a game.
