If you go for the Amiga 500, there is a big chance you'll want an Amiga 1200 later. Especially if you consider games like AGA-games/versions like Banshee, Deluxe Galaga, Simon the Sorcerer, Slam Tilt, Super Stardust, Virocop (this game rocks!).
I would personally go for the 1200 right away. Amiman99 pointed out many important factors you should consider (composite video, PCMCIA-port for transferring files, internal HD support - you name it!).
The Amiga 500 was my first Amiga, so I do of course like it a lot. It is not a bad purchase and you get a HUGE software library to explore, but... the A1200 can do most Amiga 500 stuff anyways.
Good luck on your purchase - hope your children will be happy! My daughter loves playing Noddy's Playtime on the A1200.
