In flashback, we see Josh (Patrick Wilson) Lambert, as a kid, is having trouble with the old lady with blood red lipstick, who killed Elise at the end of the first film. Elise and a man named Carl, are summoned to help with the problem, because Josh's mother, Lorraine, is worried. In time, they find out he's a special ability of astral projection during his sleep. Elsie asks if she can interview Josh, and as we see Josh through the viewfinder of an old VHS camera, Elsie begins asking Josh questions, whose answers make her tremble. Next, Elsie asks Josh to play a game of 'hot & cold' with Elise, and they find him talking to someone and a door opens, without any visible means.
We're in the present day.
Renai is speaking with a police detective (Michael Beach) about the death of Elise, and the detective says he will get in touch with her as to whether-or-not the marks on Elise were by Josh's hands. The Lambert family moves in with Lorraine, to try and get away from the things which they experienced in the first film.
But as soon as they get there, things are begin again to happen.
They first begin with Renai, hearing the piano playing and the baby chair making noises, and moving back-and-forth. Soon, feeling things are still not right, Lorraine walks in on a sleeping Dalton, who (though sleeping) tells Lorraine someone's behind her. Lorraine goes into the bathroom, and is locked in, and sees a lady.
When the door opens, Josh's behind the door and says everything is okay.
With such things happening, everyone is on edge, and while Josh is taking the kids to school, Renai gets jumpy. She sets things up with the baby (baby speakers) and she then sees a woman on the couch in Victorian dress.
The lady gets up and Renai hears her talking to the baby through the speakers, in a malevolent tone. Renai runs up the stairs to the room only for the door to slam shut on her face and lock. Renai hears the lady talking to the baby, and hears the lady smack the baby while it cries. The door opens, and the baby's missing.
Renai runs downsstairs and the lady catches her off-guard, and screams; "HOW DARE YOU!!" and smacks her so hard she's knocked out.
Meanwhile, Lorraine's troubled by the strange sightings, and the way Josh has been behaving, and decides to visit Specks and Tucker (the 2 paranormal investigators who worked with Elise when she was alive in the previous film), to try and see if there's a way to uncover what the cause of the strange goings-ons could be.
Specks and Tucker are unable to help her, but when Lorraine says, "if only Elise was still here," they remember who to contact: Carl, the spirit medium from 1986.
Carl appears at Elise's house, and apologises for not contacting them sooner, out of fear of what he saw back then.
He listens to Lorraine's story, and decides to contact Elise on the other side with the usage of word dice to allow Elise to reply to their questions. Lorraine, Specs and Tucker sit around a table, as Carl begins to ask Elise questions. He rolls the word dice and asks Elise if she is there, and 3 dice placed together spell "yes". He then asks Elise "who killed you?", rolls the dice and gets the reply; 'she did.' Carl asks; 'where is she?, rolls the dice and get a reply; 'hiding.' They ask where, and the die spell out; 'Our Lady of Angels,' a now-abandoned hospital which Lorraine used to work at, and where Lorraine said the ordeal with Josh had begun.
Back at Lorraine's home, Josh returns home, and finds Renai on the floor unconscious, a visually troubled Josh can be seen trying to pick up Renai from the floor, but his personality abruptly changes, and he begins to sniff Renai's skin and hair.
Renai regains consciousness, saying their baby has been stolen, but Josh calms her, and shows their daughter is in the crib, asleep. Renai attempts to convince Josh that something's attacking them again, and they must move away because of what happened. A stubborn Josh denies her request and says the problems would disappear if they ignore them.
Just then, both Renai and Josh hear the piano playing, and they go together to find the cause of the sound, but there's no one present at the piano. Renai realises the tune being played on the piano is the one she wrote for Josh, but when she tells this to Josh this, he shows no memory of this.
Due to rising suspicion from Renai about Josh's well-being, Josh rushes Renai out of the room, telling her not to worry and as Josh looks back into the room he smiles and says 'your home is the shadows, now.' As he leaves, the real Josh in astral-projection form, is sitting at the piano - in the shadows, and bangs the keys, and screams, 'Help!'
The next morning, Dalton speaks to his mother Renai about his reappearing nightmares involving the dead and the old woman, but more importantly, he's greatly troubled by what he has seen in his father. The night Renai confronts Josh about seeing the woman in their house, Dalton manages to see from a corner of a hallway in the house, his father Josh scolding himself profusely, and speaking to another individual, and saying the other individual must leave and go away. Dalton, clearly aware of the fact that nobody else was with his father when he was speaking, and tells Renai the next morning that the physical Josh Lambert is not occupied by the soul of his father; the true Josh Lambert.
Lorraine, Specs, Tucker, and Carl go to the abandoned Our Lady of Angels hospital, and Carl helps them find the right room. Lorraine remembers the room was an ICU unit she worked in, and where it all began.
Back in 1986, Lorraine and Josh walked into the room, and they see a patient named Parker Crane who's asleep. Josh looks away, to the machines, and suddenly Parker attacks him, as the nurses hold him down and Lorraine and her son quickly leave. Later, Lorraine getting on an elevator, and Parker gets on, as well. She tries to make small talk - saying he should be in bed, not roaming the halls, but, he does not respond. They arrive on the main floor, and Parker heads silently off towards the left, as Lorraine heads for the lobby, and goes to the receptionist and asks her why Parker Cranes' up and walking. The receptionist tells Lorraine Parker Crane had jumped off of the building that morning, and died.
Back in the present, Lorraine, Specs, Tucker, and Carl go find the records on Parker Crane, and find out where his house was. They find it abandoned. Specs and Tucker go up to Parker's room and find a little girl who tells them to go before her mother finds them and she has to kill them. Carl goes back down stairs and uses his dice, and is soon joined by Lorraine. They realise the person who'd been communicating with them through the dice wasn't Elise, but Parker Crane's mother, who called herself 'Mater Mortis,' in Latin; 'mother death'.
Just then, the crystal chandelier - which was being slowly unscrewed, crashes down, narrowly missing killing them.
They enter another room - one hidden behind a bookcase, only to find people sitting in rows under cloths, and a chestful of newspaper articles on a serial killer who wore a black wedding dress. They find the black wedding dress on a mannequin. Carl puts his hand on the dress to find out what went on with it, and sees a man putting on women's makeup as a woman sits - tied-up behind him and screams, who he murders.
They figure out Parker was the serial killer - 'The Black Bride' - who put on the black wedding dress and killed young woman, under his mother's direction, which explains who the people are under the cloths;his victims.
With this information, they understand what they're really dealing with, and head home to tranquillise Josh (who's inhabited by Parker Crane's spirit), in order to get into him out of Josh.
But things go wrong, and Carl is killed whilst Specs gets knocked unconscious, and 'Josh' stabs Tucker with the hypodermic syringe, rendering him unconscious.
Now in the Further/Shadows, Carl finds Josh and they figure they need to get Josh back in his body, so they try to find Elise. They go to Josh's old house (from Insidious 1), where they see the long-haired man from the first film pacing back-and-forth (just as RenaI saw in the first film) and all-of-the-sudden, he's inside the window - behind the curtain, in the babies room where RenaI sees him, and screams.
Just as he's going to try to take and kill the baby, Elise pops out and kills the demon, by pushing it through the window.
Elise tells Josh and Carl they must go back to the place where Parker and his mother once lived, in order to try to end it, for once and for all.
In present time, (Carl inhabiting) 'Josh' sends a text to Renai, saying it's safe to go to the house. They drive over, and are attacked by 'Josh.' Dalton comes and hits him long enough for Renai and the 2 boys to run into the basement and hide. Dalton then goes asleep to try and help rescue Josh's soul.
In the Further, they arrive at Lorraine's house where they find the way to the old lady's house, and enter. They find Parker on the bed, dressed as a girl. Parker's yelling - saying his name's Parker. His mother walks in with a drawing Parker made, and yells at him yells, 'DID YOU DO THIS?!?'
He denies at first, then says 'yes.' She yells; 'HOW DARE YOU,' and smacks him, because she says his name isn't Parker - that's what his father named him. His 'real' name is 'Marilyn.'
Just then, the mother looks over, and becomes aware of Carl and Josh watching, and she screams at them and Elise and Carl are hurtled backwards out of the room and the door slams violently shut, with Josh still inside.
Parker's mother faces Josh, and makes all the people whom Parker killed, appear in the room under white sheets. They proceed to taunt Josh.
In realtime, Josh's just about into the basement to attack Renai and the boys. He breaks in past their barriers, and pushes Renai down to kill her. He's momentarily distracted when he sees Dalton asleep. As he raises a hammer to kill Dalton, Dalton, Josh, and Elise in the Further are being assisted by Parker who is the only one who can open his childhood bedroom door which Mrs. Crane had slammed shut. Once he does this, Elise beats Mrs. Crane with a rocking horse and destroys her memories, once and for all. As Parker destroys all memories of his mother. Elise tells Carl and Josh they must leave, as this existence is quickly crumbling, and tells Carl she felt his heartbeat, and he's still alive.
Josh and Carl run out of the room, as it's disintegrating, leaving Elsie. They leave the Further, and in the darkness, they fight off attacking spirits, who are anxious to leave the Shadows for our world. As they fight the spirits, they find Dalton, and make their way back into the real world,
In present time, they all wake up in their normal bodies with their own spirits. In the next scene, they are all seated in Josh's living room before Carl who tells him that he can now hypnotise them, just as Elise did to young Josh back in 1986, and make them forget how to astral project, preventing them from going back to the Further in their dreams and inadvertently bringing spirits back with them.
They close their eyes; the camera zooms in on Josh's face, serene and beginning to forget.
- Epilogue -
Instead of the usual fade to black, the screen slowly brightens to a blinding white and then we see a sky filled with clouds. The camera pans down from the sky to a different house where Specs and Tucker knock on the door and are greeted by a family. Specs tells the man to please hear him out; Specs and Tucker are there to deliver a message to their relative, Allison. Allison is the sole survivor of the Bride in Black's killing spree, the only one who got away and gave a description to the police for the story in the newspaper that was found earlier in Parker Crane's dilapidated house.
At the door, the family's little girl asks them, "Who's the woman behind you?" Specs and Turner turn around and see no one. Next, we see through the little girl's eyes, and Elise is standing behind them. She smiles at the little girl and puts her finger to her mouth, saying "shhhh". She walks past them into the house where a young woman sits unresponsive in a wheelchair. In the background, we can hear the parents of the little girl telling Specs and Turner that they have been having problems with unseen, malevolent entities in their home. Elise crouches in front of Allison, smiles kindly, and begins talking to her, trying to help draw her out of the Further. She hears something above them, looks up, sees the light fixtures swaying - and something else - and her smile disappears. Then we hear a creaking, grotesque, guttural noise in the shadowy corner of the room behind Allison. The camera pans up; we see nothing - yet - behind her; but Elise does, and the expression on her face is one of abject terror, as she exclaims, trembling; 'Oh, my god!'