In order to mitigate the release of toxic phosphine from aluminum hypophosphite in twin-screw processing, montmorillonite–melamine cyanurate was prepared by three methods: (1) mechanical intercalation, (2) water intercalation and (3) in situ intercalation. The sheet spacing of montmorillonite was increased from 1.140 nm to 1.141 nm, 1.208 nm and 1.217 nm for these three methods, respectively, and scanning electron microscope (SEM) and transmission electron microscopy (TEM) proved that melamine cyanurate was successfully inserted into the montmorillonite sheets. The montmorillonite–melamine cyanurate from in situ intercalation can best inhibit the release of PH3 from aluminum hypophosphite, and the peaks of phosphine, mean values of phosphine and integral of phosphine were reduced by 81.9%, 72.1% and 72.2%, respectively. The mode of action of montmorillonite–melamine cyanuric inhibition of the emission of phosphine from aluminum hypophosphite can be attributed to the physical absorption of montmorillonite and the chemical bonding of melamine cyanurate. In addition, in situ intercalation can slightly improve flame retardancy, attributed to incomplete exfoliation of montmorillonite sheets.