Bio-based insulation materials (BbIMs) represent a potential alternative to conventional insulations, with their characteristics that favor a negative-carbon built environment. However, their use may face challenges that could prevent them from being used on a large scale in certain countries. The current study aims to provide focused insights into the practical difficulties and market opportunities for the application of BbIMs in Europe through a systematic literature review (SLR). The Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) guidelines were used as the basis for the conduct and reporting of this review. A keyword search was performed in Web of Science, Scopus, and ScienceDirect databases to select peer-reviewed English-language articles. HubMeta web tool was used to organize the selection process. The quantitative visualization of the literature was made by the Bibliometrix R package V4.1.4. Data were manually extracted and clustered in an Excel sheet. The review included 28 studies that have revealed interrelated insights. Difficulties range from regulatory and policy limitations and variability in performance, such as microbial growth and inconsistency in the behavior of materials under different conditions, to cost barriers. However, there are promising opportunities, including policy incentives and material performance benefits such as improved energy efficiency and indoor air quality. This research contributes to the literature by providing focused insights into the practical difficulties and market opportunities for the application of BbIMs in Europe. Research gaps and future perspectives point to the need for more field validation experiments, exploration of alternative production processes, and expanding life cycle assessment scopes to optimize their integration and performance. Stakeholders’ perceptions were made with a small sample in certain countries. Stakeholder perceptions were conducted with a small sample in some countries, so insights from stakeholders are needed to confirm or correct current findings.