Diabetes is associated with a higher dementia and mortality risk. However, few studies have accounted for death when estimating the association between diabetes and dementia. We estimated absolute and relative risks of all-cause dementia according to diabetes exposure status in older adults while accounting for competing risk of death using illness-death models. Effect modification by specific characteristics (age, gender, education, cardiovascular risk factors, body mass index, cardiovascular history, depressive symptomatology, impaired renal function, and APOEɛ4 genotype) was also investigated. We analyzed the Three-City study data, a French population-based cohort of adults aged 65 years and above who were followed up for 12 years from 1999-2001. Among 8,328 participants selected in the analytical sample (median age, 73.3 years; 60.3% women), 809 (9.3%) presented with diabetes at baseline. Over a median follow-up period of 8.3 years, 836 participants developed incident dementia. Baseline diabetes was associated with a higher risk of dementia: hazard ratio, 1.79 [95% confidence interval, 1.46-2.19]. No effect modification was shown. Diabetes was associated with a higher 12-year absolute risk of dementia and a lower dementia-free life expectancy (e.g., 14.5% [11.2-18.1] versus 8.7% [7.6-10.2], and 13.4 [12.7-14.1] years versus 16.5 [16.0-17.1] years, respectively, for a 70-year-old woman with the highest level of education). These findings support the potential impact of preventing diabetes on reducing dementia risk in older adults, with a 2-3-year higher dementia-free life expectancy for individuals without diabetes, and inform the design of future interventional trials.