"You're a ni-" could end with "-ce person", "-fty caster", or something much worse and there's no way to tell until the person says it.
This also brings up the privacy implications.If they can detect when you swear then it's very possible they can detect certain other words or even transcribe everything. You should not expect privacy when talking on xbox live but the idea of cataloguing everything you say forever should give you goosebumps. They can use it for any purpose, trust me I know.
Though Microsoft has the right not to provide a platform for such things as a private company who doesn't live off the coffers of the tax payer. The line gets a bit blurry though as these platform become ubiquitous and becomes the main means of communication. It would be like censoring people talking over the telephone. It's a grey issue.