I can tell you the way I do it for our youth ministry. There is probably a better way to do the combined names on a label and I would be interested in what that is as well, but here is what I have been doing.
I have all of my kids in a group and select a mail merge. I create a mail merge with labels and before inputting the address I add, "To the parents/guardians of:" then I input the address merge. This will give me each child on a label with the "To the parents/guardians of:" When I am putting the labels on the envelopes I just stick one one top of the other with the "To the parents/guardians of:" and the child's name showing above the second label. Again, probably not the best way to do it, but it gets it done.
Lauren