In January 2016, the Chinese government integrated the two systems of urban resident basic medical insurance and new rural cooperative medical system to establish a unified Urban and Rural Resident Medical Insurance. The integration of medical insurance is purported to enhance access for the rural population; however, a dearth of literature exists regarding its effect on functional impairment among middle-aged and elderly residing in rural areas. This study aims to evaluate the impact of urban-rural health insurance integration on functional limitation among middle-aged and elderly individuals in rural China. A longitudinal survey was conducted among 7855 middle-aged and elderly individuals in rural China. Using a nonequivalent control group pretest-posttest design, we exploit these policy changes to evaluate their impact on middle-aged and elderly individuals’ functional limitation. The results showed that the integration of urban and rural health insurance systems was significantly associated with reduced functional limitation (Odds ratio .742; 95%CI 0.603, 0.914) among middle-aged and elderly individuals in rural China. Our findings also indicate that prevalent behaviors such as tobacco use, and alcohol consumption may exacerbate functional limitation among middle-aged and elderly individuals. These findings suggest that the integration of urban and rural health insurance systems can have a positive impact on the functional limitation of middle-aged and elderly individuals in rural China and could be an important factor in improving the health and well-being of middle-aged and elderly individuals in rural areas.