As an important component of advancing the construction of the national primary healthcare system and promoting the equalization of basic medical services, the critical illness insurance for urban and rural residents is a key element in solidly promoting common prosperity. From the perspective of China’s critical illness insurance for urban and rural residents and using data from the China Family Panel Studies (CFPS) from 2010 to 2018, a scientifically comprehensive evaluation system of the common prosperity index is constructed from multiple dimensions. The DID method is used to evaluate the impact of the equalization of basic medical services on common prosperity. The findings indicate that: (1) Critical illness insurance can enhance the inclusiveness of income distribution, drive the increase in disposable income at the micro-individual level, and mitigate the disposable income gap across multi-level social networks. Mechanism testing shows that critical illness insurance can promote common prosperity by narrowing the urban-rural gap in medical burdens, improving the efficiency of medical resource allocation, and alleviating liquidity constraints. (2) From the perspective of expanding domestic demand to facilitate domestic circulation, the increase in disposable income brought about by critical illness insurance is linked to improvements in residents’ consumption and investment. The study empirically investigates the impact of critical illness insurance on common prosperity, and provides important references for accurately assessing the welfare boundaries of the critical illness insurance policy and further improving regional critical illness insurance policy arrangements.