KeyLoggers are perfectly legal. The use of them to obtain private information, is not. (That law would actually exclude anyone you are legally responsible for)
Anyway, there are thousands of Keyloggers available on the internet. A lot of them free too. I wouldn't recommend going for the free ones though, as most of them are going to send your information to somebody else as well. So I would recommend buying one.
Software is definitely preferable. Just make sure to include the keylogger on your virus/spyware scanners exclude list.
Software vs. Hardware:
Software, your children will not be able to remove, unless you grant them the privileges to do so on your computer. Software is very simple, and can be obtained through the internet, from the comfort of your own home.
Hardware, on the other hand, if one of your children were to come across this nifty little device because they accidentally unplugged the keyboard one day, they could simply remove it, and get rid of it. Creating a financial waste, and in the case of some hardware keyloggers, render your keyboard port useless until you remove the software that comes with the hardware. (Some hardware loggers will lock the use of the keyboard if the hardware is not detected after installation.)
