Abstract: Soft magnetic composites (SMCs) are core magnetic components in power electronic systems. However, a fundamental conflict exists between high electrical insulation and high thermal conduction: while the insulation coating suppresses eddy current losses, its inherently low thermal conductivity creates a "thermal barrier" at particle interfaces. This study proposes a novel magnetic-thermal co-design strategy, involving the in-situ growth of a highly thermally conductive Al2O3 insulation layer on FeSiAl powder surfaces via a reaction with KOH solution, aiming to achieve low loss and efficient heat dissipation simultaneously. The influence of the key kinetic variable—reaction time (5–50 min)—on the coating's microstructure, insulation properties, magnetic performance, and thermal management capability was systematically investigated. The results demonstrate that reaction time decisively affects the coating quality and final properties. Within the 20–30 min window, a continuous, dense, and well-bonded Al2O3 coating forms, yielding optimal overall performance: a high resistivity of 487.2 Ω·m, a low total core loss of 141.5 kW/m3 (@ 10 mT, 500 kHz), and a significantly enhanced thermal conductivity of 18.2 W·m-1·K-1, representing a 22.1% improvement over the uncoated sample. Insufficient reaction time resulted in incomplete coating and poor performance, whereas excessive duration led to a porous coating and interfacial defects, attributable to increased hysteresis loss and intensified phonon scattering. This work identifies the optimal processing window for the in-situ synthesis of Al2O3-coated FeSiAl composites via a strong alkaline route, providing crucial insights for developing high-performance SMCs for high-power-density applications.