The present study extends earlier research identifying an increased risk of anxiety among children with chronic physical illness (CwCPI) by examining a more complete model that explains how physical illness leads to increased symptoms of anxiety and depression. We tested a stress-generation model linking chronic physical illness to symptoms of anxiety and depression in a population-based sample of children aged 10 to 15 years. We hypothesized that having a chronic physical illness would be associated with more symptoms of anxiety and depression, increased levels of maternal depressive symptoms, more family dysfunction, and lower self-esteem; and, that maternal depressive symptoms, family dysfunction, and child self-esteem would mediate the influence of chronic physical illness on symptoms of anxiety and depression. Data came from the National Longitudinal Survey of Children and Youth (N = 10,646). Mediating processes were analyzed using latent growth curve modeling. Childhood chronic physical illness was associated with increases in symptoms of anxiety and depression, β = 0.20, p < 0.001. Mediating effects were also observed such that chronic physical illness resulted in increases in symptoms of maternal depression and family dysfunction, leading to declines in child self-esteem, and in turn, increases in symptoms of anxiety and depression. CwCPI are at-risk for symptoms of anxiety and depression. Some of this elevated risk appears to work through family processes and child self-esteem. This study supports the use of family-centered care approaches among CwCPI to minimize burden on families and promote healthy psychological development for children.