hi helenmh
if you are looking for minimal health risks, western peninsular malaysia (including penang) would be your best bet. although borneo has a lot to offer older kids in terms of wildlife, cultural interaction etc, it is much less "developed" than peninsular malaysia, where, for example, the tap water is safe to drink, there is no malaria risk, and the infrastructure is well developed.
i would also recommend the rasa sayang. it is right on the beach, there are a number of pools, gardens, restaurants etc - lots of kids there when we stayed. meals are rather expensive though, i would venture outside the hotel if you are cost sensitive, plenty of choice nearby. also, it is quite large and impersonal.
penang also has a lot to offer in terms of sightseeing - colonial history, temples, markets, traditional villages etc. the rasa sayang organises excursions, or you could consider hiring a car - we found the driving very easy everywhere we went.
downsides - very developed in the main resort area, plus the humidity, phew! at 6m pregnant, i was not able to get very far in the heat and our sightseeing was rather curtailed as a result!
if you wanted a multi centre holiday, peninsular malaysia is a very easy fly drive destination. we flew to kl, drove to the cameron highlands and then on to penang (there's a bridge!). i would highly recommend the cameron highlands. the scenery is beautiful, the climate very pleasant, with lots of very low key, low stress sight-seeing, plus fantastic and very cheap south indian food everywhere (a real highlight for me despite horrible pregnancy heartburn).
anyway, to sum up, if you want a single location, relatively safe in terms of health, with good beaches and pools, but also with cultural interest, penang is a good choice.
have a good time!