Mueller matrix imaging sensitivity, to delicate water content changes in tissue associated with early stages of skin cancer, is demonstrated by numerical modeling to be enhanced by localized surface plasmon resonance (LSPR) effects at the terahertz (THz) range when InN nanoparticles (NPs) coated with Parylene-C are introduced into the skin. A skin tissue model tailored for THz wavelengths is established for a Monte Carlo simulation of polarized light propagation and scattering, and a comparative study based on simulated Mueller matrices is presented considering different NPs’ parameters and insertion into the skin methods. The insertion of NPs presenting LSPR in the THz is demonstrated to enable the application of polarization-based sample characterization techniques adopted from the scattering dominated visible wavelengths domain for the, otherwise, relatively low scattering THz domain, where such approach is irrelevant without the NPs. Through these Mueller polarimetry techniques, the detection of water content variations in the tissue is made possible and with high sensitivity. This study yields a limit of detection down to 0.0018% for relative changes in the water content based on linear degree of polarization—an improvement of an order of magnitude relative to the limit of detection without NPs calculated in a previous ellipsometric study.