There's pros and cons to either option. I don't actually suggest either... but we'll come to that.
Wubi is darned near a real install, with actual hardware access, but as its a image file inside a real filesystem , it can occationally get corrupted.
VMs are reliable and do snapshots, but there's nothing stopping your kids from switching over to windows, and you don't have access to things like the graphics card.
I'd suggest a USB install - of which there's two types - unetbootin will give you a platform agnostic liveusb, with a persistant portion for changes. A full install of ubuntu can also be done to a suitably set up liveusb. Both options give you a reasonably fast install of ubuntu that can be set up to leave the main hard drive alone
There's some things i'd do with any install - Don't give the kids the admin user password (that is to say the password you use with sudo), so they can't install or break anything. Give them an individual account per kid (and since they are limited accounts, you can set it that they can't break anything), or better yet, a personal thumbdrive with the environment set up for them. Periodically image the whole USB drive ( I use usb image writer on windows quite a bit. dd would do the trick in linux) or at copy the persistant parts of the install.
I'd note personally, while i recommend limited accounts (on any os!) any kid who breaks into the admin account has earned it ;p.