Reducing income inequality has always been one of the main goals of economic policies, and the development of insurance services has been considered an important tool for alleviating poverty and reducing inequality. The aim of this study is to examine the bidirectional relationship between insurance penetration and income inequality in the Iranian economy. To this end, data related to 31 provinces of Iran during the years 2010 to 2022 were collected, and to analyze the bidirectional relationship between these two variables, a panel simultaneous equations model with a nonlinear structure including a threshold effect was estimated. The findings of the study showed that insurance penetration and the Gini coefficient mutually influenced each other, and this relationship had a nonlinear nature with a threshold effect. Specifically, an increase in insurance penetration after surpassing the threshold of 0.025 led to a significant reduction in income inequality. On the other hand, an increase in inequality beyond the threshold of about 0.34 of the Gini index had a reducing effect on insurance penetration. Furthermore, intensified income inequality itself is a factor contributing to the weakening of the insurance industry’s development in the country.