Due to harsh environment in the cutting area, access to the cutting region is still limited for the existing temperature sensors. As such, measuring temperature signals remains a challenge for real-time tool wear monitoring. In this paper, a polycrystalline cubic boron nitride (PCBN) cutting tool embedded with thin-film thermocouple (TFTC) was devised and used for tool wear monitoring during the cutting of hardened AISI O2 tool steel. A detailed manufacturing process of the smart tool was introduced. Performance tests for the smart insert were evaluated and results showed that the embedded TFTC had a sensitivity of 14.4 μV/℃, good dynamic response, and functional validity. Wear experiments were implemented under two sets of cutting parameters to explore the relationship between cutting temperature and tool wear. The results showed that the increased maximum cutting temperature could well reflect the progression of flank wear. Obvious fluctuation in temperature signal could also well reflect the abnormal condition of the tool. The devised smart tool will be useful for determining optimum cutting parameters and extending tool life.