A standard roleplaying environment: the tavern. This is another easy one to create in your own home, providing you have a large enough group of roleplaying friends. Let us assume your PC group is no larger than five, and that the rest of your friends can be NPCs. Let us also aim for an exceptionally seedy and unscrupulous city tavern.
In a good LARP it is desirable to separate the players out individually at some stage, because they are more suggestible and afraid when they are alone. Some form of individual challenge is probably the best way of doing this. One possible setting for this is a cave system, and it is probably one of the easiest to recreate realistically, and one of the most perfect for playing on fears of claustrophobia and darkness.
The religion believes in reincarnation, but that you will be reborn in the past. People of today are those re-born of tomorrow, with some discarded as trash. The most pure will be eventually reborn in the mythical paradise-like past, where people lived for hundreds, or maybe even thousands of years.
This goes nicely with beliefs into foresight (you know a little about the future because you have been there), but also to many complaints of how things are going always from bad to worse.