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iPod touch makes a great "gateway" into the Apple ecosystem for children who are too young to have an iPhone. A $200 apple device with monthly payment is the ideal Christmas/Birthday gift for kids. It allows them get hooked on the app store, and start building their music library. iTunes cards are a given at every gift opportunity. When they are ready, they can transition into a "hand me down" iPhone from Mom and Dad, and away they go...
I'm pretty sure AppleCare+ includes water damage:
...ADH coverage only applies to an operational or mechanical failure caused by an accident from handling that is the result of an unexpected and unintentional external event (e.g. drops and damage caused by liquid contact) that arises from your normal daily usage of the Covered Device as intended for such Covered Device...http://www.apple.com/legal/sales-support/applecare/applecareplus/docs/applecareplusnaen.html