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I actually pretty much agree with you that this is how the curse works, and went in depth on my thoughts in other threads. The japanese text of the game really makes it seem like Demise didn't set the curse in motion, but rather was invoking it or re-mentioning that it's a thing. How the...

I definitely think any death of a character in TP would have been trying too hard to force the narrative to seem compelling. Ilia is already considered a pretty bland character anyway by some fans so having her die would have just nailed home that they felt she was only good as a throw away...

I'd still adhere to the parallel world interpretation, Termina is real. This wouldn't change much anyway though because the Zelda Encyclopedia already claims Termina was a dream world created by Majora's Mask.