Conventional photovoltaic-thermoelectric generator (PV-TEG) systems are hindered by significant heat transfer losses, which impair power generation throughout the year. Addressing this challenge, a novel PV-MCHP-TEG system is proposed, integrating photovoltaic (PV) cell, microchannel heat pipe (MCHP) array, and thermoelectric generator (TEG) module components with strategically placed insulation layers to facilitate year-round, day-and-night power generation. This study primarily investigates the impact of insulation layers on heat transfer processes, employing a comprehensive analysis and optimization approach. Utilizing Simulink software, the multifaceted influence of insulation layer variables, including locations, thicknesses, and materials, on TEG efficiency across various conditions was examined. Further, a comparative analysis was undertaken to evaluate the dynamic payback period across different modes. The optimization of these insulation parameters revealed that incorporating Polyisocyanurate Foam (PIR) as the insulation material in the optimized PV-MCHP-TEG system achieved an efficiency of 19.32 %, marking a 2.41 % improvement over conventional PV-TEG systems without insulation. Furthermore, the dynamic payback period was reduced to 11.34 years, representing a decrease of 1.05 years compared to conventional PV-TEG systems. These findings underscore the potential of our proposed system to outperform existing solutions by optimizing thermal management through insulation, thereby offering a promising avenue for enhancing photovoltaic-thermoelectric energy conversion.