Early detection of incipient faults in AC drives is one of the most difficult challenges for condition monitoring, especially for faults related to insulation degradation of the windings. This is because insulation degradation is very difficult to be detected on-line, so these faults may pass unnoticed before turning into a major faults. This paper looks at the feasibility of using coaxially insulated windings not only to increase reliability against winding insulation problems, but as an alternative to advance condition monitoring that may be suitable for the detection of insulation degradation, and other faults not easily detected by conventional schemes such as demagnetization issues, and the presence of inter-turn short circuits. The concept of insulation degradation for the case of coaxially insulated windings is analytically considered in this work and a novel condition monitoring alternative proposed. The proposed scheme and winding topology are extensively evaluated numerical to determine their feasibility to drive condition monitoring.