It's fine to give it to your sister and have her set it up. It will be removed from your account and added to hers but that doesn't matter. What Apple ID is connected does not matter to the insurance whatsoever. There are just two big disclaimers:
1) If you have AC+ with loss protection you absolutely have to keep it connected to your Apple ID with Find My enabled. Removing your Apple ID and disabling Find My violates the insurance terms and means at the very least it won't be covered if lost.
2) If Apple ever asks it needs to be made clear that you are still the owner of the device and just handed it to your sister for the time being. As you are the policy holder only you are entitled to make insurance claims so as long as she confirms that it belongs to you, then it's absolutely fine.
Imagine you insured your car and needed to make a claim and sent your sister to deal with that. The insurance will ask if she's the owner of the car and the insurance policy holder, and she'd of course say no, it's her brother's, but he asked her to handle it. They might say ok, or they might give you a call to verify, or they might say you need to come in and handle this yourself. All very reasonable. But if she then said that this won't be possible because you gave the car to her and got nothing to do with this anymore, the insurance would cancel the claim since the insurance has a contract with you, not with your sister.
That is all there is to it. And whose property the iPhone really is up to you - obviously, who else would it be up to? If you say it's your sister's iPhone now, then it's hers. If you know you are giving it to her for the time being (however long that might be, could be decades) and it's still your iPhone, then it's yours.
