Magnetic fluid seals are contact-free rotary seals widely used to seal gas and vacuum. However, their effectiveness declines when utilized to seal liquids due to the inherent incompatibility and instability at the interface between the two liquids. The underlying mechanism for this premature failure remains incompletely comprehended, posing a significant challenge to their widespread use for sealing liquids. Here we demonstrate a novel pole structure featuring a non-magnetic shaft, which creates a closed magnetic circuit without requiring the magnetic circuit to pass through the rotating shaft. This innovative approach enables the observation of the failure processes of the seal through a hollow transparent shaft, utilizing an endoscope. The results show that the static seal failure occurrs in two stages: extrusion, infiltration, and magnetic fluid barrier rupture. In the first stage, a leakage channel opens cyclically, whereas in the second stage, the seal leaks completely once the critical pressure is surpassed. Dynamic failure arises from the intricate interplay between dissolution, extrusion, and interface instability. Upon attaining the critical speed, the flow at the interface transitions from laminar to turbulent, leading to apparent delamination fluctuations. At this point, the magnetic fluid film becomes unstable and instantly leaks from the seal upon exceeding the critical speed. This research has unveiled crucial inducing factors for seal failure that have significant implications for the design of liquid seals. The intricate and complex nature of the failure mechanism emphasizes the need for a comprehensive understanding of the interplay between the seal design, magnetic fluid properties, and operating conditions to develop efficient liquid seals with superior performance.