An example method for service insertion in a network environment is provided in one example and includes configuring a service node by tagging one or more interface ports of a virtual switch function to which the service node is connected with one or more policy identifiers. When data traffic associated with a policy identifier is received on a virtual overlay path the virtual switch function may then terminate the virtual overlay path and direct raw data traffic to the interface port of the service node that is tagged to the policy identifier associated with the data traffic.