Is it considered religiously permissible to distance oneself from relatives and a sister who cause harm and insults, and to avoid sitting with them except when necessary? And what is the best approach to deal with them in a way that pleases Allah?

There is no sin upon you for shunning your sister or anyone else if they harm you and you are distressed by associating with them. The label of 'shunning' (hajr) is removed, according to many scholars, by limiting your speech with them to what is necessary. We advise you to be more patient and enduring. However, if there is a legitimate benefit in speaking with them, such as inviting them to Allah, then do not stop speaking with them, be patient with their harm, and supplicate for their guidance.