Diabetes may impact physical and psychosocial well-being; the diabetes incidence has seen a drastic increase globally. There is also a rise in poor mental health and well-being in children with and without chronic illness; problems are being seen at a younger age. The objective of this review was to understand the determinants of these problems in a family context. We conducted a systematic review to investigate what lifestyle and psychological factors influence children with Type 1 diabetes and their parents. A focused literature search was performed using a combination of keywords that covered the relevant terminology for diabetes, target population, and associated emotional distress, using electronic bibliographic databases containing publications until May 2022. Methodological quality was assessed using the Quality Assessment Tools for Quantitative Studies. Twenty articles met the inclusion criteria. Quality scores were weak because of a lack of comparison groups, information about the type of therapy, or adequate sample sizes. Many of the studies included a wide age range in their sample. The majority of the studies reported that parents and their children showed depression symptoms, fear of hypoglycaemia, and higher parenting stress. We conclude that sufficiently powered studies employing appropriate control groups and measures are needed to elucidate the psychological variables associated with Type1 diabetes in children and the effects on parents, especially considering primary-age children who are increasingly reported to suffer from poor mental health, and its implications. This should help to introduce better targeted interventions and improve behavioural outcomes.