The aim of this study is to investigate dynamic failure initiation and failure modes of insulation panels of LNG carriers. Insulation panels of LNG cargo tanks may include mechanical failures such as cracks as well as delaminations within the layers due to impact sloshing loads and fatigue loadings, and these failures cause a significant decrease of structural integrity. In this study, a structural health monitoring system, employing fiber optic sensors is developed for monitoring various failures that can occur in LNG insulation panels. Fiber optic sensors have the advantage of being embedded inside of insulation panels. The signal of embedded fiber optic sensors is used to calculate the strain of insulation panels and is processed by digital filtering to identify damage initiations. It has been observed that the presence of defects and delaminations produce noticeable changes in the strain measurement in a predictable manner. In addition, fiber optic sensors are used to measure static and dynamic strain variations of insulation panels with and without damage. It is expected that this study will be used as a fundamental study for the safety assessment of the LNG insulation panels.