My wife, daughter and I stayed at the Palace from 2/13 to 2/20. I can't say enough nice things about the place; it was clean, great service, and the food was quite good. It was close enough to town for us to walk everywhere we wanted to go. The staff tried to be as helpful as possible, and were extremely friendly. My wife (non-diver) and daughter made use of and loved the spa facilities. We all have decided we will return to Cozumel, and will stay at the Palace again.
We did see a few toddlers there, and saw the staff make every effort to accomodate their needs. They have a small "kids club", but I don't know anything about those activities. There is no kiddie pool, although the pool has several sections so there are often uncrowded areas. There is no real shallow area for small kids, though. There are some sandy areas that would be good for running around, but I'd want to keep a close eye on a small child there; the ocean access is close by and by ladder and there are places a small child could fall in - the dock, etc.. We did not see a play structure, and there is a trampoline in the water - but that is not for toddlers.
My daughter (14) and I dove with BlueXTSea, and they picked us up each morning at the dock with a fast boat. This worked great for us, and we did not regret not staying further south. We all loved the food, the rooms, even the cheesy evening activities at the Palace, and the intimacy of the place compared to the big AI's on the mainland. No reservations for dinner, eat what and where you want, top shelf drinks and bottled wine, 24 hr room service and unlimited phone calls to the US all included. After diving, we would hook up with my wife, hit the pool, play volleyball, have a drink and a sandwich or nachos at the pool bar and relax.
The Palace was a great choice for us and we will return. You have different considerations with the toddlers along, and may want to look for information on what the other places may offer for that age group. I hope some of this helps, and have a great time!
