Um, did you really just tell your kids they could call people 'faggots' in seriousness?
Not a friendly "you faggot, you drank the last Coke". But someone they do not like, in public, where they'll hear -- can your kids call someone they don't like a 'faggot' as an insult?
Faggot means homosexual. Calling someone who is not a homosexual a faggot is an insult and no, they can't use it for that. If someone is a homosexual, yes, they can use it. That's what the word means.