The deployment of solid-state transformers (SSTs) in medium-voltage (MV) distribution systems is facing various challenges, especially the challenge of insulation coordination design against grid-originated lightning impulses. In this article, two challenges in existing insulation coordination designs for grid-connected SSTs are identified. One challenge is the mismatch between metal-oxide varistor (MOV) protective levels and SST insulation strength, the other challenge is the incompatibility of standard impulse test on SST protective structures. To address the MOV selection challenge, a novel lightning protection scheme is designed to protect a single-stage SST where the semiconductor modules are directly exposed to external lightning impulses. The in-lab lightning impulse tests are performed to verify the overvoltage attenuation performance of the prototyped lightning protection scheme. To address the impulse test challenge, the surge withstand capability of the protected SST is comprehensively evaluated with a complete set of insulation coordination design procedures beyond the basic insulation level (BIL) test. After these two challenges are addressed, a discussion is presented on substituting conventional transformers with the protected SSTs into insulation-coordinated distribution systems to facilitate the field deployment of SSTs.