The dielectric relaxation characteristic and mechanism of thermochromic microcapsule-epoxy insulating material are investigated. The results show that thermochromic microcapsule-epoxy insulating material exhibits non-monotonic dielectric relaxation characteristic, namely the dielectric relaxation time gradually increases with the temperature rising in a range of about 58–66 ℃, which cannot be depicted by the conventional Arrhenius equation or Vogel-Fulcher-Tammann equation. It is proposed that the non-monotonic dielectric relaxation characteristic is derived from the free volume variation induced by the confined phase transition in microcapsule. With the increase of temperature, the solid-liquid phase transition occurs in the limited space of microcapsule, reducing the free volume inside the microcapsule, which could restrict the reorientation of dipole with the external electric field and lead to the increase of dielectric relaxation time. The non-monotonic dielectric relaxation characteristic of thermochromic epoxy specimen is fitted based on the confined dielectric relaxation model, obtaining the activation energy of dielectric relaxation. The relaxation activation energy values of thermochromic epoxy insulating materials with different microcapsule content are of the same order of magnitude, indicating that the non-monotonic dielectric relaxations occur inside the thermochromic microcapsule, verifying the role of confined phase transition in the non-monotonic dielectric relaxation characteristic.