1) They are strictly NPC, but you can tell them to do things. As family they are far more likely to do as they are told. You will be given the character codes over your family so you can choose to leave them open (meaning they can become PC without your input), or lock them and save the codes (meaning you can come back to life as them or give the code to a friend making them PC).
2) You can marry another PC.
- Children interact. This is VERY important if you plan on making an heir because what you do to/with your children helps their skills. I believe there was even mention of sending kids off to an apprenticeship. They will live a normal child's life, presumably you can buy them toys and stuff.