Natural ester (NE) insulating oil is increasingly recognized as an ideal insulating medium for power equipment, attributed to its high ignition point and biodegradability. As power systems advance to higher voltage levels, enhancing the dielectric properties of natural ester insulating oil has emerged as a key research focus. While nanoparticles enhance dielectric properties, their limited dispersion stability restricts practical applications. Liquid crystals, a novel functional modification material compatible with insulating oil, provide a new approach for modifying NE due to their unique mobility and anisotropy. Experimental results indicate that incorporating liquid crystal molecules at a 0.3% mass fraction enhances the AC breakdown strength of natural ester insulating oil by 16.7%. By combining molecular dynamics and density functional theory principles, the microscopic mechanism of liquid crystal modification was analyzed by modeling oil molecules before and after modification. The study found that liquid crystal molecules significantly reduce the system’s free volume and hinder water molecule diffusion through hydrogen bonding. Furthermore, the high electron affinity of liquid crystal molecules reduces carrier mobility by capturing free electrons, thereby effectively suppressing partial discharges and electrochemical reactions. This study investigates the modification mechanism of a novel functional material on the dielectric properties of natural ester insulating oil from a microscopic perspective.