Disability has become a critical issue among elderly populations, yet limited large-scale research related to this issue has been conducted in China, an aging society. This study explored sex and urban-rural differences in disability transitions and life expectancies among older adults in China. Data were collected from the Chinese Longitudinal Health Longevity Survey (CLHLS), which enrolled people aged 65 and older and was conducted in randomly selected counties and cities across 22 provinces in China. Disability was diagnosed based on basic activities of daily living (BADLs) and instrumental activities of daily living (IADLs). Several individual characteristics were assessed, including sociodemographic factors (age, sex and region, etc.) and health behaviors (currently smoking, currently drinking, etc.). Multistate models were applied to analyze the transition rates among 4 states: no disability, mild disability, severe disability and death. The transition rates from disabled states to the no-disability state were found to decrease markedly with age. The rates of recovery from mild disability in rural areas were higher than those in urban areas. Rural elderly individuals lived shorter lives than their urban counterparts, but they tended to live with better functional status, spending a larger fraction of their remaining life with less severe disability. Based on these findings, devoting more attention and resources to rural areas may help less severely disabled people recuperate and prevent severe disability. The study provides insights into health plan strategies to help guide the allocation of limited resources.