Because the terahertz wave has strong penetrating ability, high imaging resolution, and strong anti-interference ability, the non-destructive testing technology based on terahertz reflection imaging has become a research hotspot in the field of insulator defect detection. In this paper, the propagation characteristics of terahertz wave in medium were firstly introduced, and a propagation model was constructed to analyze the terahertz wave refraction and reflection phenomena at the defect interface caused by the discontinuity of medium existing a defect. Then the finite difference time domain (FDTD) method of electromagnetic wave was elaborated, and geometric modeling and simulation of silicone rubber material was conducted by using a full wave 3D electromagnetic simulation software on the basis of the equation that electric field varies with time based on FDTD theory. It was found that the distribution difference of terahertz waves observed on the observation surface which was 2.5 mm away from the center of model, can reflect the size and location of internal defect, which provided a simulation method for theoretical studies. Finally, the academic cases of using terahertz imaging technology to detect internal defects in insulators were reviewed, and the problems that the detection distance affects the sensitivity, the background noise affects the imaging resolution, and the identification of defect types were analyzed and prospected.