The low-voltage electric machine (EM) is a core technology for transportation electrification, and features like high power density and compact volume are essential prerequisites. However, these requirements are usually in conflict with the reliability property of EM, especially in the safety-critical industry such as aviation. Therefore, an appropriate balance between high-performance and reliability needs to be found. Often, the over-engineering method is applied to ensure safety, although it might have a detrimental effect on the EM volume. To address this issue, the EM reliability assessment is included at the EM design stage through the physics of failure (PoF) theory. In EMs, the windings play a key role in electromechanical energy conversion, but their insulation system is subject to frequent failure and represents a reliability bottleneck. Therefore, in-depth research on the root causes of insulation breakdown is beneficial for EM reliability improvement purposes. Indeed, increasing awareness and knowledge on the mechanism of the insulation degradation process and the related lifetime modeling enables the growth of appropriate tools for achieving reliability targets since the first EM design steps. In this work, the main aspects of the insulation system, in terms of materials and manufacturing, are first reviewed. Then, the principal stresses experienced by the winding insulation system are deeply discussed with the purpose of building a profound understanding of the PoF. Finally, an overview of the most common insulation lifetime prediction models is presented, and their use for accomplishing the reliability-oriented design (RoD) and the remaining useful life (RUL) estimation are examined.