There have been a number of "cute" pictures circulating recently with dogs and kids. No one is suggesting not letting your dog interact with your kids or vice versa, just please be aware of the signs that your dog is, or may be, uncomfortable. Dog's generally don't like being hugged, some do and some tolerate it, but hugging is a primate behaviour, not a canine one.
The vast majority of dogs are absolutley solid around kids, nearly all the time, but it just takes one moment when the dog isn't feeling well etc and it may react. Be aware of what your dog is telling you.
A good way to test this is the "5 second rule". Pet/hug your dog for a maximum of 5 seconds and release. if your dog comes back to you for more, he is happy with the contact and we can repeat for another five seconds and then test again. If your dog walks away or turns his/her head away, he is disengaging and doesn't want you to continue. Respect his wishes, we don't always want hugged and would rightfully object or feel uncomfortable it this was the case.
Teach your kids this too. It is a good way to teach them how to interact with dogs and respect them. We should never force our dogs to do something they don't want to do unless it is to absolutely necessary for their well being. Hugging doesn't qualify in this category.
Watch for, among other things, your dog flicking his tongue when he is hugged, child sits on him etc. This is a fair indicator that your dog isn't comfortable. Thanks to Doggone Safe for the picture.
Also some comments from that post:
Glasgow Dog Trainer and Behaviour Consultant All these signs, including the yawn, are called calming signals. They are exhibited when, but not exclusively, the dog is trying to calm himself. If you look at videos on youtube, where the handlers use compulsion based training (prong collars, choke chains, shock collars) you will see these signals often. Again, it's all about context. Your dog can yawn when tired too obviously.