We present two-dimensional Mg(OH)2 sheets and their vertical heterojunctions with CVD-MoS2 for the first time as flexible 2D insulators with anomalous lattice vibration and chemical and physical properties. New hydrothermal crystal growth technique enabled isolation of environmentally stable monolayer Mg(OH)2 sheets. Raman spectroscopy and vibrational calculations reveal that the lattice vibrations of Mg(OH)2 have fundamentally different signature peaks and dimensionality effects compared to other 2D material systems known to date. Sub-wavelength electron energy-loss spectroscopy measurements and theoretical calculations show that Mg(OH)2 is a 6 eV direct-gap insulator in 2D, and its optical band gap displays strong band renormalization effects from monolayer to bulk, marking the first experimental confirmation of confinement effects in 2D insulators. Interestingly, 2D-Mg(OH)2 sheets possess rather strong surface polarization (charge) effects which is in contrast to electrically neutral h-BN materials. Using 2D-Mg(OH)2 sheets together with CVD-MoS2 in the vertical stacking shows that a strong change transfer occurs from n-doped CVD-MoS2 sheets to Mg(OH)2, naturally depleting the semiconductor, pushing towards intrinsic doping limit and enhancing overall optical performance of 2D semiconductors. Results not only establish unusual confinement effects in 2D-Mg(OH)2, but also offer novel 2D-insulating material with unique physical, vibrational, and chemical properties for potential applications in flexible optoelectronics.