Abstract: To address the issue of income disparity among residents, policy-based agricultural insurance, as an instrument combining both fiscal and financial functions, has attracted growing attention for its income distribution effects. Accordingly, this study decomposes the income distribution effects of policy-based agricultural insurance into direct and indirect effects and conducts an empirical analysis using panel data from the China Family Panel Studies (CFPS) covering the period from 2012 to 2022. The results indicate that policy-based agricultural insurance significantly alleviates income inequality. From a mechanistic perspective, the income distribution effects are more pronounced for households with greater inputs of land, labor, and capital. Heterogeneity analysis further shows that the positive income distribution effects are stronger in regions outside the Yangtze River Economic Belt, in non-major grain-producing areas, among households located farther from transportation infrastructure, among households with better-educated household heads, and among agricultural households. Based on these findings, this study suggests optimizing the subsidy structure and regional allocation of policy-based agricultural insurance and promoting its coordinated interaction with agricultural production factors, thereby enhancing its effectiveness in income redistribution.