M.P.
I doubt that your daughter is having a psychological breakdown. It is common for kids to go through stages when they fear bugs. But it usually passes.
It does cause me to wonder about why she gets so scared when she doesn't even see a bug but says she does. I'm guessing she was seriously frightened by a bug or someone teasing her with a bug and now she's over reacting.
I suggest that you ignore her fear as much as possible. Yes, hold her and say you're sorry she's so scared but don't try to talk her out of being scared. When she's fine tell her you're not afraid of bugs and talk about the good things bugs do for us. Perhaps find some books with drawn pictures of bugs and tell a story about the bugs.
I"ve heard it suggested to give a child a "bug go away spray" which would be a spray bottle of water so that she can spray the bug. This will make the bug go away.