Ferromagnetic Fe-Co-Hf-N nanocomposite films were fabricated by reactive r.f. magnetron sputtering. Their magnetoelastic properties were exploited to realize a new sensor system that is able to monitor stress or stress induced temperature and thereby to control the wear process in cutting tools during metal working. The ferromagnetic films were combined with wear resistant Ti-Al-N and insulating SiO2 (or both) interface layers, in order to provide a wear resistant coating and to decouple the ferromagnetic film from the substrate which is made from WC-Co. Sensing was carried out by means of a measuring head which utilizes a frequency mixing technique to monitor the change of temperature due to thermally induced stresses represented by the change of the magnetic permeability of the sensing layer. This change in permeability results in a change of the frequency components of the sensor signal Fourier transformation. During a metal cutting process in a lathe, wear and tool failure was observable which is indicated by a stronger or sudden increase of the temperature. The difference in amplitude gains between intact cutting insert and its imminent failure could be denoted by more than 100%.