There has been significant change in the way buildings are constructed and the way building energy performance is evaluated. Focus on solely the use phase of a building is beginning to be replaced by a life-cycle based performance assessment. This study assesses the environmental impact trade-offs between the heat produced to meet a building's space heating load and insulation produced to reduce its space heating load throughout the whole life-cycle of a building. To obtain a more realistic valuation of this tradeoff, a dynamic heat production model, which accounts for political projections regarding change in Danish energy supply was used in the analysis. This novel approach of generating inventory for Life Cycle Assessment (LCA) helped to refine an understanding of optimal insulation levels. The findings of this study discourage the over-insulation of houses connected to the district heating grid, which is potentially promoted at present in Danish regulation. It is further concluded that improvement of the mineral wool insulation production process could allow for greater levels of environmentally beneficial insulation and would also help in reducing the overall environmental burden from insulating buildings.